Bank of America: Look Elsewhere For Gains
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bank of America (NYSE: BAC) made news in March after the company announced that it was launching a pilot program that would allow some homeowners currently at risk of foreclosure to remain in their homes as renters. Under the program, which began that week, less than 1,000 borrowers would be allowed to transfer the title of their homes to Bank of America and have their mortgage debt forgiven. Bank of America would then allow them to rent their homes for up to three years, charging rents at or below the current market rate.
Bank of America launched its test program in Arizona, Nevada and New York. The bank targeted homeowners at “considerable risk” of foreclosure. This definition includes people that owe more than their home is worth, have exhausted all loan modification programs and have been delinquent on their mortgage payments for more than 60 days. At minimum, this will ensure that homeowners behind on their mortgages will pay something rather than just riding out the 4-6 months it takes from when you stop paying on your mortgage until the house is seized. It should also help improve the homeowners’ credit scores, making the recovery process easier and faster than if a full eviction would go on record.
I think this is an extraordinary move, even if it does remind me of an episode of the television show “House of Lies” that aired earlier this year. In the episode, which was called, “Gods of Dangerous Financial Instruments,” a group of consultants tell a major bank that its executives can give themselves the massive bonuses they were used to pre-recession if they extended special loan terms to a select few. They called it a “grab and switch” and likened it to the way a person can get his wallet boosted on the subway by paying more attention to the person who bumped into him that the accomplice picking its pocket.
This may not be the case here, but the coincidence is uncanny. It makes me wonder what is going on that we can’t see. What we do know is that Bank of America is still planning on shrinking its balance sheet in an effort to streamline its operations and focus more on its core businesses. Bank of America CEO Brian Moynihan is reportedly trying to cut costs in response to the low interest rates and new regulations that are strangling the company’s revenues.
One of the ways it is doing this is by selling some of its foreign credit card operations. Earlier last year, Bank of America sold its $8.6 billion Canadian credit card operations, plus a few other assets and liabilities, to Toronto Dominion Bank. Then, the company sold its Spanish consumer credit card operations to Apollo Global Management in August 2011 and more recently it has announced that it would be selling its Irish credit card operations to the same.
Bank of America is also trimming its workforce in a bid to reduce its operating expenses by $5 billion before the end of 2014. While it has not yet said as to exactly how many jobs will be cut in the restructuring, it is expected to eliminate roughly 30,000 jobs over the next few years. The exact numbers should be finalized next month.
As it stands, Bank of America looks like a gamble to me. While the company is priced low relative to its future earnings and has better than average revenue growth, it has massive debt, with an debt to equity ratio is currently at 2.71, which is higher than its peers, on average. The company has a weak net profit margin which, at 6.40%, trails its industry’s mean net profit margin. Plus, Bank of America’s share price isn’t exactly encouraging. It has performed poorly with regard to its stock price, going from $13.58 on March 23, 2011 to just $9.60 at the close of trading on March 22, 2012 – a loss of roughly 30%. In comparison, the market actually gained 9.61% over the same period.
Competitor Citigroup (NYSE: C) is in a little bit of a better position. The company may have missed passing the Fed’s stress test by 0.1%, but its cash flow increased over 20% and has shown increased credit quality lately coupled with higher capital levels and a general increase in corporate lending. While it has lost a little in its quarterly earnings per share lately, it is on track to rebound this year and its fiscal earnings per share showed an improvement from last year ($3.61 vs. $3.50). The company recently traded at just over $37 a share and is priced low relative to its future earnings.
Rival JP Morgan Chase (NYSE: JPM) is positioned even better. It has shown strong profit margin increases, beating its industry’s average in terms of both gross and net profit margins. JP Morgan is also trending an increasing return on equity. The company also completely annihilated the Fed’s stress test, earning the right to increase its dividends not once but twice since the financial crisis hit. At roughly $45 a share, JP Morgan is also priced low relative to its future earnings.
I’m not sure what Bank of America is up to – maybe nothing – but I’d rather put my money in a company like JP Morgan because I can see a positive trend and understand why it’s there. There really isn’t anything in Bank of America’s profile that I find exciting or encouraging. The company could turn things around, but for now my money is on JP Morgan.
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