Bank of America Corporation
) 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%.
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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
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.
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).
Other Stocks to Consider
Better-ranked banks include
Fifth Third Bancorp
Huntington Bancshares Incorporated
). All these stocks hold a Zacks Rank #2 (Buy).