Could Bank of America be the best of the banking bunch?

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Bobby Raines 01/20/2014

The big names in the financial industry reported earnings last week. Results were mixed, with Bank of America ( BAC ) exceeding expectations, Citigroup (C ) missing badly, and everyone paying more attention to JP Morgan's legal fees than to the actual performance of the underlying company.

Of the nation's large retail banks, Bank of America ( BAC ) may be the healthiest at this point. Citigroup's big miss was due in part to a slowdown in its mortgage operations and less activity at its bond-sales operations. Both of those were to be expected given rising (albeit slowly) interest rates, but unfortunately for Citi, the company's other units couldn't compensate.

Wells Fargo also suffered from slower mortgage activity as the company has been the nation's leading underwriter in recent quarters. Rising interest rates are causing a broad shift away from refinance activity and the company has been cutting staff in its refinance segment. New home sales will eventually return to making up a larger portion of mortgages, which is a good thing overall, but means a slower stream of underwriting fees for big banks.

Bank of America also saw a slowdown in mortgage underwriting and fixed-income trading, but a rising stock market helped boost the company's asset management and investment-banking operations to offset losses suffered in those other units.

The improving economy helped the bank elsewhere, the company is holding less money in reserve to cover potential losses. Those reserve releases flow directly to the company's bottom line, helping to boost earnings. There is some controversy about whether banks are using loan-loss reserves to boost earnings improperly. The jury is still out on whether or not that is the case, but Bank of America doesn't to be taking advantage of the practice more than any of its peers, which says that it at worst in the same boat as the competition.

Those rising interest rates and an improving economy should help the company going forward as the easiest money a bank can make is what appears on its earnings report as "net interest income." This is all the interest the bank earns from its various lending activities, minus the interest that the bank pays out to bondholders, depositors and other creditors.

Bank of America's net interest income rose by 4 percent from the fourth quarter of 2012 to $11 billion. This will likely improve even further as the bank writes new loans at higher interest rates, while still offering low rates to depositors.


Chart courtesy of Stockcharts.com

Bank of America's stock has outperformed its peers in recent months. The stock is up 17.3% over the last three months, compared to a 9.9% increase for Wells Fargo, a 9.24% gain for JP Morgan and a 3.46% rise for Citi. This earnings report suggests that traders' faith in Bank of America may be in the right place, it still has some potential legal and regulatory liabilities remaining from the run up to the financial crisis, but I'm not sure Bank of America's sins are too much worse than the sins of its peers and Bank of America seems to be doing better than its peers in terms of turning a profit in the current environment.

Traders looking to make a relatively short-term bet on Bank of America could consider a March 14/16 bull-put credit spread for a 20-cent credit or better. This position targets a return of about 11%, or 66.48% on an annualized basis (for comparison purposes only).  It also returns a full profit so long as the stock closes above 16 and March expiration, giving it 6.3% downside protection.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: BAC

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