3 Reasons to Buy Bank of America
Dec 21st 2012 6:00PM
Updated Dec 21st 2012 6:02PM
Bank of America (NYS: BAC) has made some real headway this year, and it's always good form to give credit where it's due. Despite lingering problems, investors are feeling good about the country's second-largest bank, and I think I can understand why. Here are three positive steps the bank has taken over the past year or so that could very well put B of A on investors' shopping lists this holiday season, and beyond.
Project New BAC is working
When CEO Brian Moynihan took over the top spot from predecessor Kenneth D. Lewis two years ago, he had his work cut out for him. The bank had become a behemoth, sinking under the weight of hasty acquisitions and a falling stock price. The following year, he announced a plan, called Project New BAC , designed to bring the bank out of the pit into which it had slid. It's been a little over a year since the program's implementation, and, unlike many such grandiose projects, it has actually worked.
By far the most praiseworthy result of the plan is the bank's robust capital cushion, which Moynihan has trumpeted as the best in the business. He has cause to boast: B of A's Tier 1 capital ratio is now a healthy 8.97% under Basel III regulations, higher than rivals Wells Fargo (NYS: WFC) , Citigroup (NYS: C) , and even JPMorgan Chase (NYS: JPM) . What's even more amazing is how Moynihan pulled it off in such a short span of time.
The bank has been selling off non-core assets at quite a clip, unloading property that it inherited during the takeover of Merrill Lynch. In addition, billions of dollars' worth of mortgage servicing rights also went on the auction block, relieving B of A of assets against which it would have to hold additional capital under Basel III.
All in all, Moynihan recently stated that his bank has sold off a stunning $60 billion of its former bloat, acquiring $12 billion toward its capital reserves. More slimming is on the way as well: Moynihan plans to further trim the bank's mortgage servicing portfolio from its current 8 million loans down to 6 million.
Next year's stress test is looking less stressful
All that extra cash is making the 2013 Federal Reserve's upcoming bank stress test less scary, too. Bank of America passed the test earlier this year, albeit by the skin of its teeth, prompting an embarrassing moment for the CEO when his request to hike dividends was denied by the Fed. Although Moynihan has stopped short of making any predictions in that regard for next year, things are definitely looking rosier.
As some analysts have noted , cutting the fat may have propped up the bank's reserves, but maintaining the cushion necessitates something more. The bank needs to increase income, too - something that Moynihan has recently addressed.
B of A is nurturing money-making ventures
Bringing in additional income will surely be on the Fed's checklist as it looks at how hale and hearty banks have become, and how ably they will be able to weather economic storms. Bank of America has taken steps to foster units that can bring home the bacon, such as boutique banking, mortgage lending, and online banking services.
Private banking is becoming a sought-after side business for big banks, which are smarting over income lost from the once-hot mergers and acquisitions business, as well as restrictions on revenue due to new regulations. Bank of America, JPMorgan, Goldman Sachs (NYS: GS) Wells Fargo, and Citigroup have all been expanding their specialty banking arms that cater to the well-heeled set. Moynihan recently demonstrated, at the Goldman Sachs conference, that its own concierge banking section is definitely adding to the bank's bottom line.
At that same conference, Moynihan also pointed out the need for B of A to increase mortgage lending. This is huge, as the bank has been skittish about lending since the subprime market tanked, for obvious reasons. But housing is recovering, and mortgage loans make money for banks. Though the bank's 18% jump in lending from last year isn't stupendous, it's a start.
Lastly, B of A recognizes the value of mobile and online banking. Moynihan's presentation showed that consumers' use of mobile for banking services has grown 30% over the past year, and that processing such transactions cost almost nothing, when compared with banking activity at a branch location.
Research backs this up. A recent study from Intuit shows that mobile bankers are more involved with their bank and are, on average, over 60% more profitable than customers who don't use online services. Seeing a great opportunity, B of A is giving mobile banking a big push , encouraging customers to download the bank's apps as well as outlining mobile options with each new customer.
Bank of America is still dealing with myriad problems, some of which, such as legacy loan issues with Countrywide, may dog the bank for years. But the positive steps outlined here show that the bank is on the mend, and taking steps to bulk up capital and grow revenue. Bank of America just might be making a comeback after all.
There is a ton of interest in B of A right now, as investors demonstrate faith in the bank's ability to recover from past missteps. To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.
The article 3 Reasons to Buy Bank of America originally appeared on Fool.com.Fool contributor Amanda Alix has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Goldman Sachs Group and Wells Fargo & Company. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.