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2 Pros, 2 Cons for Investing in Bank of America Corp Stock

Tom Taulli

Since mid-March, Bank of America Corp (NYSE:BAC) has been in a somewhat bearish phase, as the stock has gone from $32.84 to $28.90.

Yet much of the banking sector has been in a funk anyway. Look at the lackluster performances of companies like Wells Fargo & Co (NYSE:WFC), Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM).

Part of this has been due the overall volatility in the markets. But there are also nagging concerns about the growth in the US economy. Might rising interest rates have too much of an adverse effect?

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Well, it’s tough to tell. But I think there may be some opportunities with banks, especially BAC. So let’s take a look at 2 pros and 2 cons.

2 Pros For Bank of America Stock

#1 — Powerful Platform

Dealing with the impact of the financial crisis has been a long and agonizing progress for BAC. But, for the most part, the problems are a thing of the past. The company has cut costs, unloaded various divisions and worked out arrangements with regulators.

The bottom line is that BAC is a top-notch bank, with tremendous scale. In the US, the company is No. 1 in market share for consumer deposits, home equity lending, wealth management (in terms of client assets, deposits and loans) and personal trust assets under management.

BAC also has a fairly clean balance sheet. Keep in mind that the net charge-off ratio is only 0.75% of assets and BAC has been conservative with its allowances for loan and lease losses, which is at about 1.1% or $10.3 billion.

#2 — Growth

The latest quarter shows that BAC continues to grow at a nice pace. Revenues came to $23.13 billion — up from $22.25 billion on a year-over-year basis. As for earnings, they rose by 30% to $6.92 billion. At the current pace, BAC could generate close to $30 billion in net income this year.  In fact, the company posted return on equity of 10.85%.  This is the first time since 2011 that this metric has been over 10%.

There are several key drivers that are powering the solid results — no doubt a big one is the healthy economy, although, perhaps, the biggest factor is the rise in interest rates. The core profits of BAC come from the difference between the interest it earns on loans and the amounts it pays for deposits. The good news is that deposit rates have remained fairly low, which has meant strong improvements in margins.

Finally, BAC has been investing in new technologies to improve efficiencies and spur growth. An example of this is the Zelle peer-to-peer payments app (which involves a consortium of various large banks). In the most recent quarter, there were 29 million transactions — for a total of $9 billion in volume. The growth ramp was a sizzling 130%.

2 Cons for Bank of America

#1 — Risk Aversion

While it is important to take measures to protect the balance sheet, these efforts can go too far. If anything, they could mean missing out on lucrative opportunities.

In the case of BAC, there are actually indications of this. In the latest quarter, the loan growth was somewhat muted at 3%. To put this in perspective, there were increases of 4% at JPM and 7% at C.

BAC has also lagged with fixed-income and commodity trading. This segment was off by 13% in the quarter to $2.5 billion (Wall Street was looking for $2.92 billion). The performance should have been much better given the volatility in the markets.

#2 — Digital Risks

BAC’s forays into mobile apps and web applications does have its issues. It’s tough to compete with mega tech operators like Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL). These companies have enormous resources and massive platforms to leverage off of.

But a company like BAC must also deal with the risks of its own technologies. Just look at Zelle. While it is solid app, there could be vulnerabilities to fraud. Keep in mind that there have already been reports of scams.

Verdict on BAC stock

While Bank of America may be overly conservative, this is probably a good thing. A critical lesson of the financial crisis is that banks can quickly become vulnerable when systems break down.

{Besides, as seen with the latest quarter, BAC is growing at a steady pace. The valuation is also reasonable, with the forward price-to-earnings ratio at 10. And while the dividend is kind of meager — at 1.6% — there will likely be ongoing increases.

So all in all, the pros generally outweigh the cons, making BAC stock a good value right now for investors.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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