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Is Bank of America a Value Buy after 2Q16 Results?

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PBV ratios

Bank of America’s (BAC) shares are currently trading extremely cheap compared to its peers, which is evident from the company’s price-to-book multiple (or PBV). The PBV ratio compares the company’s current market price to its book value. PBV ratios are commonly used to compare financial services firms because most of the banks’ assets and liabilities are constantly valued at market values. If a company trades lower than its book value, it means the asset value is overstated or the company is generating a poor return on its assets. Generally, banking stocks (XLF) trade between one to two times their book value. Stocks trading lower than their book value attract investor attention, as they are considered to be generating extremely poor returns.

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Bank of America trades at a discount to its book value

Bank of America trades at a PBV of 0.59x. This implies a discount of ~41% to its book value. Such cheap valuations are associated with a bank in crisis and are also a sign of the company’s poor profitability. Its peers JP Morgan (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) trade at a significant premium to Bank of America.

In 2015, Bank of America generated a return on assets of 0.74%, lower than its target of 1%. The company generated $15.9 billion in profits. In 2Q16, Bank of America generated a return on assets of 0.78%. However, if interest rates go up, the company’s profitability will improve, and the stock will have significant upside potential.

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