Bank of America (NYSE:BAC) seems locked into a dance of "two steps forward, two steps back." While the company got itself into a huge mess with poor underwriting and acquisition decisions, the company continues making mistakes like taking shortcuts in its foreclosure process. The conundrum for investors is that Bank of America has an invaluable branch network and strong positions in key states like California, Texas and Florida, but that network will never get full value absent evidence that B of A can run itself effectively and earn its cost of capital.

TUTORIAL: Top Stock-Picking Strategies

Another Bank with Swampy Second Quarter Results
Like Citigroup (NYSE:C), and indeed most large banks, Bank of America's second quarter earnings are complicated by all manner of charges, gains and items. At the bottom-most bottom line, though, the company delivered on its guidance and produced earnings of 33 cents after those items. Of course, reserve release is still a big part of the story, and Bank of America saw $2.4 billion in earnings from this line item, while tangible book value fell about 4%.

Operating performance was still weak, however. Revenue fell 8% from the year-ago period and 6% from the first quarter. Net interest income dropped 13% and 7% over those time periods as the net interest margin declined and assets dropped about 1%. There is little sign of momentum in loans (consumer loans were flat) and fee income fell due in part to a large decline in trading - a common issue this quarter at other companies like Citigroup and Goldman Sachs (NYSE:GS).

Can Bank of America Run Its Own Assets?
Banks like PNC (NYSE:PNC) are paying quite a lot of money to get access to attractive markets like Florida, and it wasn't so long ago that the same was true of California and Texas. That suggests there is some real value in BOA's retail operations - this is the number-one bank in Florida, the number-two bank in Texas, and the number-one bank in California by a wide margin.

What's more, these market shares are going to be difficult to surmount. Wells Fargo (NYSE:WFC) and Citi are leading competitors in these markets and will not be able to expand share through acquisition. Likewise, BBVA (Nasdaq:BBVA) and BNP Paribas (which own Compass and Bank of the West, respectively) have bigger issues today than ongoing U.S. expansion. The bigger risk, then, may be that regional players like Regions (NYSE:RF) get bids from would-be national rivals, but that is an expensive proposition.

The question, though, is whether or not Bank of America can run this business effectively. The deals for Countrywide and Merrill Lynch have clearly not worked out as intended, but Bank of America has had plenty of its own mistakes to account for recently. If Bank of America can deliver a clean return on equity in excess of 10% (and this company used to routine do better than that), its discount to tangible book will disappear and it will be a good bank to hold. But at this point that is still very much an "if".

The Bottom Line
Unlike Citigroup, though, Bank of America does not have an exciting ex-U.S. banking franchise, nor a great non-bank fee business like US Bancorp (NYSE:USB). That leaves it with a great deal of exposure to the U.S. banking industry - an industry that has a much higher regulatory burden today and one whose growth prospects are modest.

That said, Bank of America does look like a reasonable holding for aggressive investors willing to bet that current management will either hit that ROE target or the board will find someone who can. It is not the best-run bank in the U.S., nor the one with the best long-term growth prospects, but in terms of discount to ongoing value, it may be at or near the top of its U.S. peers. (For additional reading, take a look at Analyzing A Bank's Financial Statements.)

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

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. 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.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... 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. 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 >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

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!