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Bank of America’s Valuation Gap Is Shrinking on Operations, Tests

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Jul. 6 2017, Updated 10:36 a.m. ET

Core banking key for growth

Bank of America (BAC) stock has risen 10.6% over the past six months and 87.1% over the past year, backed by the expectation of banking deregulations, the Choice Act, higher NIMs (net interest margins), higher deposit and subdued credit offtake, and higher trading activity. In 1Q17, the bank posted net income of $4.4 billion, compared to $3.0 billion in 1Q16. In the coming quarters, Bank of America’s performance in core banking, corporate, retail, and mortgages should be key for garnering higher valuations.

BAC stock is currently trading at a marginal 1.5% discount to its 52-week high, driven by the recent spike in financials in the wake of expectations for deregulation by the Trump administration as well as the passing of stress tests by almost all major banks.

In 1Q17, the bank generated a ROA (return on assets) of 0.88%—higher than its 2016 return of 0.82%. Its book value per share rose 5% to $24.36 while its tangible book value rose 6% to $17.23.

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Valuations upbeat on macros

The commercial banking space (XLF) is valued by price-to-book and adjusted price-to-book or PBV multiples. Bank of America is trading at a PBV multiple of 1.00x, compared to the industry average of 1.26x. The bank is trading at a premium valuation only to Citigroup (C).

In comparison, Bank of America’s peers are trading at the following PBV multiples.

  • JPMorgan Chase (JPM): 1.41%
  • Citigroup (C): 0.88%
  • Wells Fargo (WFC): 1.56%

These discounted valuations have come mainly from marginally less diversification, post-2007 weaker performance, higher regulatory costs, risk policies, and failures in three of six stress tests. However, the gap has shrunk in recent quarters, mainly due to a rebound in earnings, improved credit portfolio, rising NII and NIMs, and the Wealth Management division.

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