5 Factors That Differentiate Bank Of America From Other Banks Of America
On 12th February, 2013, the banking index of Nasdaq (IXBK) was trading around 2024, one of the highest levels it ever had in recent years. Considering the index for a slightly longer period, it clearly shows that this upward trend is a consistent phenomenon. The banking sector seems to have bottomed out at a level since the third quarter last year. After the 2008 crisis, growth of the US banking industry has been hindered by various regulatory and legislative bindings. Capital requirements under reforms like the Dodd-Frank Act and Basel III had been posing a challenge to the growth of banks. Besides, risk management issues, inflation and exchange rate fluctuations are some of the reasons for the shaky growth of this industry. However, it seems that since mid-2012, these challenges have been more or less resolved, and a fundamental ground has been laid down for the banking industry to finally outperform the market. If we look into the regulatory challenges, most banks have made their capital adequacy ratio in line and greater than that of the levels required by regulations. Some examples: Bank of America Inc. (BAC) strengthened its capital position, and its estimated Basel III Tier I common capital ratio was 9.25% at 4Q12 which is far above the 2019 8.5% requirement. Similarly, Citigroup Inc. (C) has Tier I common ratio in the range of 11.8% to 12.7% from 4Q11 to 4Q12 and Tier I capital ratio in the range of 13.55% to 14.1% in the same period, which is again quite above the required level.
Bank stock prices certainly bottomed in Q1 '09 and they have been in rehab, building capital, settling suits etc., and there should be further eps and balance sheet improvements, driving shareprices higher. BAC, for example has earnings power probably in the $2.25 - $2.50/ps in the next several years, but one wonders over the long term if eps growth will match historical rates as regulations impair non interest income opportunities and a long term rise in ratesl bury values of loans on the books, particularly mortgage debt, written at current rates. The banking industry may well track the performance of the utility industry.