After falling nearly 25% year-to-date, an argument can be made that Bank of America (NYSE:BAC) is currently undervalued. The Financial Sector SPDR (NYSE:XLF) has remained relatively flat, and has actually increased by approximately 3% over the same time interval. After excluding the 2010 BAC performance, which currently makes up 7% of the financial ETF, XLF would have appreciated by around 5%.

IN PICTURES: Top 7 Biggest Bank Failures

Fundamental Valuation
Bank of America currently carries $131 billion of cash and cash equivalence on its balance sheet, which amounts to about $13.14 per share. Furthermore, with $2.339 trillion dollars in total assets and $2.109 trillion in total liabilities, the book value of BAC shares sits at slightly over $23. Based on these metrics and its current trading price of around $11.70, Bank of America is trading at cheap multiples.

In its latest financial quarter, BAC generated total revenues, net of interest expenses of $26.7 billion, which was slightly greater than its performance for the equivalent 2009 period. However, compared to 2009 when the bank suffered a loss of 26 cents per diluted share, third quarter earnings performance was significantly worse at a loss of 77 cents a share. Much of this loss arose from a $10.4 billion goodwill impairment. Without the impairment, earnings would have actually been 27 cents per share.

Balance Sheet Improvements
Despite a major decrease in share price, Bank of America has been showing significant balance sheet improvements in crucial areas. The banks total asset base increased by $4.1 billion throughout the year while its long term debt was reduced by $44 billion. Tier 1 common equity increased by 12.7% and the tier 1 common equity ratio improved by 137 basis points. With improving credit conditions, the provision of credit losses was also reduced by nearly 50% compared to the same time last year. Account attrition also improved by 27% compared to 2009 third quarter results.

Risks
A primary concern with the Bank of America balance sheet is the $478.9 billion dollar of long term debt, which creates an excessive net debt position. However, this type of scenario is common for major financial institutions. JP Morgan (NYSE:JPM), for example, holds $24 billion of cash, but carries long term debt of over $255 billion. Nonetheless, BAC remains relatively more levered as its long term debt to total assets ratio stands at 0.205, while the corresponding metric for JPM is 0.119. The risks of excess leverage have been slowly emerging, as Bank of America has taken on more long term debt as a percentage of total assets every year since 2005.

Bottom Line
Among the major US banks, Bank of America has suffered the most extensive losses to its share price, performing far worse than JP Morgan, Goldman Sachs (NYSE:GS), Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C). With a per share cash position and book value that exceed the current trading price, BAC may be undervalued even after factoring in the added leverage risks. As indicated previously, commendable efforts have been made to reduce the debt burden of the bank. (Find out what most investors are doing wrong, and how you can do it right. See 10 Timeless Rules For Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  6. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  8. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  4. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  5. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!