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Do Bank of America’s Valuations Look Attractive in 2017?

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Dec. 26 2016, Updated 9:05 a.m. ET

PBV ratios

Bank of America’s (BAC) shares are currently extremely cheap compared to its peers. We can judge that by the company’s PBV (price-to-book-value) multiple. The PBV ratio compares the company’s current market price to its book value.

PBV ratios are commonly used to compare financial services (XLF) firms, because most assets and liabilities of banks are constantly valued at market value. 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 trade at one to two times their book value. Stocks trading lower than their book value attract investor attention since they’re considered to be generating extremely poor returns.

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Bank of America’s PBV ratio

Bank of America trades at a PBV ratio of 0.85x. That implies a discount of ~15.0% to its book value. Such a cheap valuation is associated with a bank in crisis and is also a sign of a bank’s poor profitability.

In 2015, Bank of America generated an ROA (return on assets) of 0.74%, which was lower than its target of 1.0%. It generated $15.9 billion in profits. In 3Q16, the bank had an ROA of 0.90%. However, if interest rates rise, the bank’s profitability could improve, and the stock could have a significant upside potential.

Peers JPMorgan Chase (JPM), Wells Fargo (WFC), and Goldman Sachs (GS) trade at a significant premium to Bank of America.

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