Bank of America’s (BAC) shares are currently trading extremely cheaply compared to those of its peers. This has been determined by the company’s price-to-book value multiple (or PBV). The PBV compares a company’s current market price to its book value.
PBV ratios are commonly used to compare financial services companies because most banks’ assets and liabilities are constantly valued at market values.
If a company is trading lower than its book value, it means that its asset value is overstated or that it’s generating a poor return on its assets. Generally, banking stocks (XLF) trade between one to two times their book values. Stocks trading lower than their book values attract investor attention, as they’re considered to be generating extremely poor returns.
Bank of America is trading at a PBV of 0.67x. This implies a discount of ~33% to its book value. Such cheap valuations are associated with a bank in crisis. They’re also a sign of the company’s poor profitability.
In 2015, the company generated a return on assets of 0.74%, lower than its target of 1%. It also generated $15.9 billion in profits. In 2Q16, Bank of America generated a return on assets of 0.78%, as its earnings remained under pressure due to low interest rates.
If interest rates rise, the company’s profitability will improve, and its stock has significant upside potential. Its peers JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) are trading at PBVs of 1.05x, 1.4x, and 0.64x, respectively.
Now let’s take a look at how Bank of America rewards its shareholders.