Turn Around in Banking
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Talk about investing in the banking space and mostly bad memories pop up. The poor credit quality caused the recent crash and it seems Bank of America (NYSE: BAC) is finally staging its turnaround. The shares of the bank are up more than 60% YTD, yielding returns higher than almost all banks in the country. Most of the investors back in the day thought that Bank of America would have made a lousy investment. Struggling with its lawsuits coupled with a poor state of the economy, the bank had posted an $8.8 billion loss in the same quarter last year. However a lot has changed since then, and no, I’m not just talking about the stock price.
In the recent quarterly results, Bank of America reported a net income of $2.46 billion, compared to the $8.8 billion loss in the year ago quarter. Quarterly non-interest income rose from $1.9 billion in 2011 to $12.4 billion this year. The non-interest expenses shrank by nearly 17% and the provisions for credit losses plunged by more than 45%. The commercial lending segment saw a 23% increase, which rose consecutively for the sixth straight quarter. Overall the results were positive and support a strong case for turnaround in Bank of America.
Bank of America recently announced that it would be laying-off 16,000 of its employees by the end of 2012. The job cuts are a part of the New BAC under which, the bank would be looking to cut another 14,000 jobs by the end of 2013, in order to save $5 billion in annual expenses. In a total, Bank of America would be laying-off nearly 11.25% of its work force. The reduced expenses would reflect as added earnings, which come out to be $1.25 billion/quarter.
A big positive, which the entire US banking system will enjoy is QE3. The Federal Reserve Bank will be buying $40 billion worth of mortgage backed securities every month. This would reduce the level of toxic assets that banks like Bank of America are holding on their books.
The three competitors might be trading at nearly the same valuations, but Bank of America steals the show with its lowest debt to equity levels. Keeping in the mind the current growth prospects of the banks, analysts expect that Bank of America would yield the highest EPS growth next year, amongst the mentioned peers.
Also on taking a look at the YTD performance of the three banks, we can see that Bank of America has clearly outperformed its peers in terms of stock returns.
Bank of America reported stellar performance in the recent quarterly results. To further boost its numbers, the layoffs by the bank are a positive for the investors if the performance of the reduced workforce isn’t hit. The bank recently announced that it would be settling the lawsuit by Merrill’s investors by paying $2.46 billion. This might put pressure on the bank over the short term period, but the good fundamentals and QE3 bonanza are expected to be a big positive for the stock over the longer run. Additionally the bank has outperformed its peers in terms of stock returns YTD, and it is due to these mentioned reasons that I believe that the stock is heading head north.
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PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.