Bank of America Corporation’s (BAC) initiatives to strengthen its balance sheet have reaped success, as reflected in the improved capital ratios. The stock closed at $15.43 on Dec 2, which marked a positive year-to-date return of 28.6%.
Moreover, BofA’s efficiency initiative, Project New BAC along with its innovative new products in its retail channel imparts a competitive edge. Considering these factors, it seems that keeping the company’s shares in your portfolio will not be a bad idea.
However, persistent pressure on the top line, a still low rate environment, litigations and various regulatory issues are expected to affect near-term results. Therefore, we discourage further addition of its shares to your portfolio.
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Justification of Stance
BofA’s third-quarter 2013 earnings per share of 20 cents beat the Zacks Consensus Estimate by 11.1%. Better-than-expected results were driven by lower non-interest expense and a substantial reduction in the provision for credit losses.
Though BofA went through a challenging period due to the overall market volatility and wide exposure to the risky segment of the market, the company returned to profitability in 2010 and has performed decently since then. Further, BofA has been trying to realign its balance sheet in accordance with the regulatory changes after the economic crisis.
However, we remain concerned about BofA’s increased cost structure. Though operating expenses declined over the preceding quarters due to efficient implementation of cost-cutting initiatives, expenses will likely rise in the near term due to continuous investment in franchise. Moreover, deposit re-pricing pressure, lower loan levels and pressure from derivative positions are dragging BofA’s net interest yield.
In line with our analysis, the Zacks Consensus Estimate reflects a mixed scenario. While the Zacks Consensus Estimate for 2013 rose 1.1% to 90 cents in the past 60 days, for 2014 it fell 1.5% to $1.32 over the same time frame. Hence, BofA now has a Zacks Rank #3 (Hold).
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