Investing in Bank of America

Bank of America Corporation (BAC) is the second largest bank operating in the United States today, with branches in all 50 states and offices around the world. Its main competitors at the national level are JP Morgan Chase (JPM) and Wells Fargo & Company (WFC). Regional competitors include SunTrust Inc. (STI),Citibank (C), Capital One (COF), PNC Bank (PNC), M&T Bank (MTB), U.S. Bancorp (USB), Bank of New York Mellon (BK), and Regions Financial (RF). Numerous smaller banks and credit unions compete with Bank of America on a statewide basis as well as in sparsely populated areas of the country.  

In the realm of global banking,  Compass Compass (BBVA), a subsidiary of the Argentine bank Banco Bilbao Vizcaya Argentaria, has made inroads into the U.S. market in the past decade. Other foreign owned banks, such as the Royal Bank of Scotland GroupGroup (RBS) and Deutsche Bank (DB), also operate branches in the U.S. Even in aggregate, however, foreign owned banks represent a relatively small share of the U.S. financial market. 

Brief History  

Bank of America, as it exists today, arose from the merger of California based BankAmerica with NationsBank in 1998. BAC is currently headquartered in Charlotte, North Carolina. NationsBank is the legacy of the North Carolina National Bank (NCNB), which completed several mergers to become that state’s largest bank in 1979. NCNB crossed state lines for the first time in 1982 with its purchase of a First National Bank in Lake City, Florida. By 1988, NCNB had expanded beyond the Southeast into Texas and, in 1991, was renamed NationsBank, the immediate predecessor of BAC. Following its takeover of MBNA in 2006, BAC became the largest bank operating in the U.S.

Stock profile

BAC’s stock gained value throughout the 1990’s, splitting 2:1 in 1997 and again in 2004. Its value peaked in 2006 at $54.77 per share. Starting in 2007, however, BAC’s value declined, eventually plummeting to less than 10% of its 2006 peak. As of 2011, JP Morgan Chase exceeded BAC in total assets; however, BAC remains among the five largest U.S. banks.

Stockscouter currently rates BAC a 4 out of a possible score of 10, compared to a 9 for JP Morgan Chase and a 7 for Wells Fargo. shares similar recommendations. These assessments reflect a general trend among investment analysts: In contrast to its top two competitors, BAC has only begun to regain the profitability and momentum it enjoyed prior to the financial crisis of 2008.

An Independent Prospectus

A recent Wall Street Journal article from Jan. 2012 highlights the key obstacles facing BAC as it strives to recover from the financial crisis of 2008. 

“In addition to its other woes, the bank is being squeezed by an industry wide revenue decline, tougher regulations, and rocky financial markets.”

The message I take away from this statement is: although its competitors face similar challenges, the stricter oversight imposed on BAC during the bank bailout translates into a longer recovery time as well as more volatile movements in its stock price during this prolonged recovery phase. 

As far as prospective stockholders are concerned, it is helpful to consider both short term and long term trends. On the one hand, the value of BAC is unlikely to fall below its nadir of $3.95 a share (Jan. 2009). Since then, the stock’s value has climbed above $18 per share on one occasion but stands at $8.03 per share as of this writing.  

In late 2011, BAC cut over 30,000 jobs and may close as many as 700 branches in the next few years. In the April 2012 Conference Call, the trustees acknowledged a declining trend in customer usage of branch banking with an increased preference for mobile and online banking as well as ATM outlets. Clearly, the prospects for short term growth are challenging; nonetheless, these recent downsizing moves may make the bank far more competitive in the long run. As such, BAC shows definite potential for long term recovery and growth.  

As the past two decades have shown, the value of all large U.S. banks has moved in lockstep with the performance of the U.S. economy. If BAC remains competitive with JP Morgan and Wells Fargo, it will continue to be a major player in the realm of national banks. Whether it regains its position at the head of the pack, however, remains uncertain.