Thematic evaluation
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Bank of America Corp. (BAC)

September 06, 2024

Compared to: JPMorgan Chase & Co. (JPM) | Citigroup, Inc. (C) | Financial Select Sector SPDR Fund (XLF)

Our reasoning

Bank of America appears moderately undervalued based on its below-average P/E and P/B ratios, strong market position, and growth prospects in digital banking. While profitability metrics and high financial leverage present concerns, the current valuation seems to price in a scenario between the base case and pessimistic case, potentially offering upside if the company can execute its growth strategies effectively and benefit from positive catalysts such as rising interest rates or successful digital transformation.

Key takeaways
  • Bank of America Corp. (BAC) is a diversified financial services company with a strong revenue growth trajectory, but its profitability is declining.
  • BAC has a strong liquidity position and a high financial leverage, which could be a concern if not managed effectively.
  • The company has identified several growth opportunities, including market expansion, M&A, R&D, geographic expansion, and strategic focus areas.
  • BAC faces several risks and threats, including legal and regulatory actions, credit and market risks, interest rate and liquidity risks, cybersecurity threats, climate-related risks, and risks related to the company's participation in government programs.
  • Valuation analysis suggests that BAC is currently trading at a discount to its peers.
  • BAC's historical price performance has been mixed compared to the Financial Select Sector SPDR Fund (XLF) and its peers.
  • Management guidance suggests that BAC expects continued revenue growth and strong profitability in the coming quarters.
  • Overall, BAC is a financially sound company with a strong track record of returning capital to shareholders. However, the company's declining profitability and high financial leverage are potential concerns. Investors should monitor these factors closely to assess the company's future performance.
Undervalued
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Evaluation summary

  1. Company Overview:

    • Bank of America Corp. (BAC) is a diversified financial services company operating in a highly competitive and regulated industry. Its business model revolves around providing a wide range of banking, investing, asset management, and other financial services to individual consumers, small and middle-market businesses, institutional investors, and governments.
    • BAC's revenue is generated through four main business segments: Consumer Banking, Global Wealth & Investment Management, Global Banking, and Global Markets. Consumer Banking offers credit, banking, and investment products and services to consumers and small businesses. Global Wealth & Investment Management provides investment management, brokerage, banking, and retirement products. Global Banking focuses on lending-related products and services, integrated working capital management, and treasury solutions for clients. Global Markets provides sales and trading services, as well as research, to institutional clients across fixed-income, credit, currency, commodity, and equity businesses.
    • BAC's target market is broad, encompassing individuals, businesses, and institutions across various segments. The company leverages its extensive network and digital capabilities to reach a diverse customer base.
    • For comparative analysis, we will be using the Financial Select Sector SPDR Fund (XLF) as a benchmark and Citigroup, Inc. (C) and JPMorgan Chase & Co. (JPM) as industry peers.

  2. Financial Performance:

    • BAC has demonstrated strong revenue growth in recent quarters, driven by both interest income and non-interest income. Interest income has been increasing, likely due to rising interest rates and growth in lending activities. Non-interest income has also been increasing, driven by growth in fee-based businesses, such as investment banking and asset management.
    • The company's profitability has been declining, as evidenced by the decreasing net profit margin. This could be attributed to factors like higher interest expense or increased competition.
    • BAC's return on average assets (ROA), return on average total equity (ROE), and return on average invested capital (ROIC) are all below the industry average, indicating that the company is not as efficient at generating profits as its peers.
    • Compared to its peers, BAC has underperformed both Citigroup, Inc. (C) and JPMorgan Chase & Co. (JPM) over the past year and two years. However, BAC has outperformed C over the past three years. This suggests that BAC's performance is not consistently better than its peers.

  3. Operational Efficiency:

    • BAC's balance sheet analysis reveals a strong liquidity position, with the current ratio consistently above the industry average. This indicates that the company has ample resources to meet its short-term obligations.
    • Working capital analysis suggests potential inefficiencies, as the company has experienced fluctuations in its working capital, particularly in the fourth quarter of 2023.
    • Cash flow analysis shows strong net operating cash flow generation, with an increasing free cash flow margin. This indicates that the company is becoming more efficient at generating cash from its operations.
    • Asset quality assessment reveals a potential concern with the increasing provision for risks and charges, suggesting a potential increase in credit risk.
    • Free cash flow trend analysis shows a positive trend, with increasing free cash flow margins. This suggests that the company is becoming more efficient at generating cash from its operations.
    • Capital expenditure analysis shows flat capital expenditures, indicating a focus on organic growth rather than significant investments in new assets.
    • Dividend and share repurchase sustainability analysis suggests that the company has a strong track record of returning capital to shareholders.
    • Compared to its peers, BAC has a higher risk profile, as evidenced by its larger maximum drawdown.
    • Short-term and long-term liquidity ratio analyses indicate a strong liquidity position, with the current ratio and quick ratio consistently above the industry average.
    • Debt-to-equity and leverage ratio trend analyses show a high financial leverage, with the total debt to total equity ratio above the industry average. This suggests that the company is relying heavily on debt to finance its operations.

  4. Growth Opportunities:

    • BAC has identified several growth opportunities, including market expansion, M&A, R&D, geographic expansion, and strategic focus areas.
    • The company is expanding its market reach through organic growth and strategic acquisitions.
    • BAC is investing in R&D to enhance its digital capabilities and develop innovative products and services.
    • The company is exploring geographic expansion opportunities to tap into new markets.
    • BAC's strategic focus areas include customer-centric strategies, innovation, and strategic investments across its businesses.
    • The company has a track record of successfully executing its strategic plans.

  5. Risks and Threats:

    • BAC faces several risks and threats, including legal and regulatory actions, credit and market risks, interest rate and liquidity risks, cybersecurity threats, climate-related risks, and risks related to the company's participation in government programs.
    • The company is involved in various legal proceedings and regulatory investigations related to its deposit insurance assessments, consumer sales and marketing practices, and administration of unemployment insurance prepaid debit cards.
    • The company's high financial leverage could be a concern if it is not managed effectively.
    • The company's declining profitability could be a concern if it continues.

  6. Valuation Analysis:

    • Valuation analysis using multiple metrics, such as P/E, EV/EBITDA, and price-to-book, suggests that BAC is currently trading at a discount to its peers.
    • Compared to its peers, BAC's valuation metrics are generally lower, indicating a potential undervaluation.
    • Potential catalysts for BAC's valuation include continued revenue growth, improved profitability, and a reduction in its financial leverage.

  7. Price Performance:

    • BAC's historical price performance has been mixed compared to the Financial Select Sector SPDR Fund (XLF). While BAC outperformed XLF in the 1-year and 6-month periods, it underperformed in the 2-year, 3-year, and 3-month periods.
    • BAC's performance has been more volatile than XLF's, with periods of significant outperformance followed by periods of underperformance.
    • Compared to its peers, BAC has underperformed both Citigroup, Inc. (C) and JPMorgan Chase & Co. (JPM) over the past year and two years. However, BAC has outperformed C over the past three years.

  8. Future Outlook:

    • Management guidance suggests that BAC expects continued revenue growth in the coming quarters, driven by continued investment in its business and expansion of its lending activities.
    • The company expects its profitability to remain strong, but it will need to continue to control expenses to maintain profitability.
    • Analyst estimates suggest that BAC's earnings per share (EPS) will grow in the coming quarters.
    • The company's financial flexibility is likely to remain strong, given its strong capital position and access to debt markets.

  9. Summary:

    • BAC is a diversified financial services company with a strong revenue growth trajectory, but its profitability is declining.
    • The company has a strong liquidity position and a high financial leverage.
    • BAC has identified several growth opportunities, including market expansion, M&A, R&D, geographic expansion, and strategic focus areas.
    • The company faces several risks and threats, including legal and regulatory actions, credit and market risks, interest rate and liquidity risks, cybersecurity threats, climate-related risks, and risks related to the company's participation in government programs.
    • Valuation analysis suggests that BAC is currently trading at a discount to its peers.
    • BAC's historical price performance has been mixed compared to the Financial Select Sector SPDR Fund (XLF) and its peers.
    • Management guidance suggests that BAC expects continued revenue growth and strong profitability in the coming quarters.
    • Overall, BAC is a financially sound company with a strong track record of returning capital to shareholders. However, the company's declining profitability and high financial leverage are potential concerns. Investors should monitor these factors closely to assess the company's future performance.
Peer fundamentals 
Fundamentals
Insights
  • Bank of America is experiencing strong revenue growth, driven by both interest income and non-interest income.
  • The company's profitability is declining, which could be a concern if it continues.
  • The company's liquidity position is strong, but it will need to continue to manage its cash and due from banks effectively to maintain its liquidity.
  • The company's financial leverage is high, but its solvency position is strong.
  • The company's asset utilization efficiency is declining, which could be a concern if it continues.
  • The company's cash flow generation is strong, and its free cash flow margin is increasing.
  • The company's capital expenditures are flat, which could indicate a focus on organic growth rather than significant investments in new assets.
  • The company's acquisition strategy is likely to continue to be a key driver of growth.
  • The company's decreasing customer deposits and increasing provision for risks and charges could be potential red flags.
  • The company's overall financial health is strong, but it will need to continue to manage its expenses effectively and improve its asset utilization efficiency to maintain its profitability and growth.
Analysis
  • Revenue - Bank of America's revenue growth is strong, driven by both interest income and non-interest income. - Interest income is increasing, which could be driven by rising interest rates or growth in lending activities. - Non-interest income is increasing, which could be driven by growth in fee-based businesses, such as investment banking or asset management. - The company's focus on digital transformation and expansion of digital banking capabilities is likely driving the increase in non-interest income.
    • Profitability
      • The company's profitability is declining, as evidenced by the decreasing net profit margin.
      • This could be due to factors like higher interest expense or increased competition.
      • The company's return on average assets, return on average total equity, return on average total capital, and return on average invested capital are all below the industry average, indicating that the company is not as efficient at generating profits as its peers.
      • The company's profitability is decreasing, which could be a concern if it continues.
    • Liquidity
      • The company's liquidity position is strong, as evidenced by the current ratio being above the industry average.
      • This suggests that the company has ample resources to meet its short-term obligations.
      • The company's liquidity position is strong, but it will need to continue to manage its cash and due from banks effectively to maintain its liquidity.
    • Solvency
      • The company's financial leverage is high, as evidenced by the total debt to total equity ratio being above the industry average.
      • This suggests that the company is relying heavily on debt to finance its operations.
      • The company's solvency position is strong, but it will need to continue to manage its debt levels effectively to maintain its financial stability.
    • Operational Efficiency
      • The company's asset utilization efficiency is declining, as evidenced by the decreasing return on average assets, return on average total equity, return on average total capital, and return on average invested capital.
      • This suggests that the company is not as efficient at generating revenue from its assets as its peers.
      • The company's efficiency is declining, which could be a concern if it continues.
    • Cash Flow Analysis
      • The company's cash flow generation is strong, as evidenced by the increasing net operating cash flow.
      • The company's free cash flow margin is increasing, indicating that the company is becoming more efficient at generating cash from its operations.
      • The company's capital expenditures are flat, which could indicate a focus on organic growth rather than significant investments in new assets.
      • The company's acquisition strategy is likely to continue to be a key driver of growth, as evidenced by the increase in issuance/reduction of debt, net.
    • Risk Factors
      • The company's decreasing customer deposits could be a concern, as it could indicate a loss of market share or a shift in customer preferences.
      • The increasing provision for risks and charges could also be a red flag, as it suggests a potential increase in credit risk.
      • The company's high financial leverage could be a concern if it is not managed effectively.
      • The company's declining profitability could be a concern if it continues.
    • Future Outlook
      • The company's revenue is likely to continue to grow in the coming quarters, driven by continued investment in its business and expansion of its lending activities.
      • The company's profitability is likely to remain strong, but it will need to continue to control expenses to maintain profitability.
      • The company's cash flows are likely to continue to grow in the coming quarters, driven by continued investment in its business and expansion of its lending activities.
      • The company's financial flexibility is likely to remain strong, given its strong capital position and access to debt markets.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-04)
Financial Select Sector SPDR Fund (XLF)
  • Performance Comparison:
    • BAC's historical performance has been mixed compared to XLF. While BAC outperformed XLF in the 1-year and 6-month periods, it underperformed in the 2-year, 3-year, and 3-month periods. This suggests that BAC's performance is not consistently better than XLF's.
    • BAC's performance has been more volatile than XLF's, with periods of significant outperformance followed by periods of underperformance. This suggests that BAC's performance is more susceptible to market fluctuations.
  • Risk and Return Analysis:
    • BAC's annualized returns have been lower than XLF's in the 2-year and 3-year periods. This suggests that BAC has not been as effective at generating returns as XLF.
    • BAC's annualized volatility has been consistently higher than XLF's, indicating that BAC's price movements are more erratic and unpredictable. This suggests that BAC carries a higher risk profile than XLF.
    • BAC's maximum drawdown was significantly larger than XLF's, indicating that BAC is more susceptible to significant price declines. This further supports the conclusion that BAC carries a higher risk profile than XLF.
  • Risk-Adjusted Performance:
    • XLF's Sharpe ratio has consistently been higher than BAC's, indicating that XLF offers better risk-adjusted returns. This suggests that investors are rewarded with higher returns for taking on the risk associated with XLF.
    • BAC's beta values have generally been higher than XLF's, indicating that BAC is more sensitive to market movements. This suggests that BAC's price movements are more likely to be amplified by market fluctuations.
  • Overall Assessment:
    • BAC's performance has been mixed compared to XLF, with periods of outperformance followed by periods of underperformance. BAC's higher volatility and larger drawdowns suggest that it carries a higher risk profile than XLF. While BAC's beta values have generally been in line with the market, they have been more volatile than XLF's, indicating that BAC's sensitivity to market movements is more variable. Overall, XLF appears to offer better risk-adjusted returns than BAC, making it a potentially more attractive investment option for investors seeking a balance between risk and return.
    • The recent trends in volatility, drawdown, and Sharpe ratios suggest that BAC's risk profile remains elevated compared to XLF. However, the decline in volatility and the upward trend in Sharpe ratios in the first half of 2024 suggest a potential improvement in BAC's risk-adjusted returns. Investors should continue to monitor these trends to assess BAC's future performance and risk profile.
Peers Price History(as of 2024-08-29)
JPMorgan Chase & Co. (JPM)Citigroup, Inc. (C)
  • Performance Comparison:
    • BAC has underperformed both Citigroup, Inc. (C) and JPMorgan Chase & Co. (JPM) over the past year and two years. However, BAC has outperformed C over the past three years.
    • BAC's performance has been inconsistent relative to its peer companies, with periods of outperformance and underperformance.
  • Risk and Return Analysis:
    • BAC has provided lower annualized returns than JPM over the past year, two years, and three years. However, BAC has outperformed C over the past three years.
    • BAC has been more volatile than C but less volatile than JPM.
    • BAC has experienced the largest maximum drawdown of 46.64% in Q4 2023, indicating a higher risk profile compared to its peer companies.
  • Risk-Adjusted Performance:
    • BAC's Sharpe ratio has been lower than JPM's, indicating that JPM has been offering better risk-adjusted returns.
    • BAC's beta suggests a moderate risk profile, similar to its peer companies.
  • Overall Assessment:
    • BAC has underperformed its peer companies in terms of returns and risk-adjusted returns over the past year and two years. However, BAC has outperformed C over the past three years.
    • BAC has a higher risk profile than its peer companies, as evidenced by its larger maximum drawdown.
    • BAC's volatility has been more closely aligned with JPM's than C's.
    • BAC's beta suggests a moderate risk profile, similar to its peer companies.
    • Investors should consider BAC's higher risk profile and its inconsistent performance relative to its peer companies before making any investment decisions.
Peers Fundamentals(as of 2024-06-30)
JPMorgan Chase & Co. (JPM)Citigroup, Inc. (C)
  1. Market Position and Size:
    • Bank of America Corp. (BAC) is the second largest company in the peer group, with a market capitalization of 311702.0 million, which is roughly half the size of the largest company, JPMorgan Chase & Co. (JPM). BAC's market cap is significantly larger than Citigroup, Inc. (C), which is the smallest company in the peer group. BAC's market cap is positively correlated with its revenue, EBITDA, and net income, suggesting that its market valuation is reflective of its overall financial performance.
  2. Profitability and Efficiency:
    • BAC's profitability metrics are mixed compared to peers and industry averages. BAC's Net Profit Margin is greater than C's Net Profit Margin, but less than JPM's Net Profit Margin and the industry average. BAC's return on assets, equity, and capital are also mixed compared to peers and industry averages. BAC's Return on Average Assets is greater than C's Return on Average Assets, but less than JPM's Return on Average Assets. BAC's Return on Average Assets is equal to the industry average. BAC's Return on Average Total Equity, Return on Average Total Capital, and Return On Average Invested Capital are all greater than C's respective metrics, but less than JPM's respective metrics. BAC's respective metrics are all less than the industry average. This suggests that BAC is more profitable and efficient than C, but less profitable and efficient than JPM. BAC's profitability and efficiency are in line with the industry average.
  3. Financial Health and Stability:
    • BAC's liquidity and solvency metrics are mixed compared to peers and industry averages. BAC's Current Ratio is less than C's Current Ratio and JPM's Current Ratio, but greater than the industry average. BAC's Total Debt to Total Equity Ratio is less than C's Total Debt to Total Equity Ratio and JPM's Total Debt to Total Equity Ratio, but greater than the industry average. This suggests that BAC is less liquid than C and JPM, but more liquid than the industry average. BAC's debt position is less leveraged than C and JPM, but more leveraged than the industry average.
  4. Valuation and Market Perception:
    • BAC's valuation metrics are mixed compared to peers and industry averages. BAC's Enterprise Value To Sales is greater than C's Enterprise Value To Sales and JPM's Enterprise Value To Sales, and greater than the industry average. BAC's Price To Earnings is less than C's Price To Earnings, but greater than JPM's Price To Earnings and the industry average. BAC's Price to Book Ratio is greater than C's Price to Book Ratio, but less than JPM's Price to Book Ratio and greater than the industry average. BAC's Price To Sales Ratio is greater than C's Price To Sales Ratio, but less than JPM's Price To Sales Ratio and less than the industry average. This suggests that BAC is more expensive than C and JPM on a sales basis, but less expensive on an earnings and book value basis. BAC's valuation is above the industry average.
  5. Cash Flow and Capital Management:
    • BAC's cash flow metrics are mixed compared to peers, considering market caps. BAC's Net Operating Cash Flow is greater than C's Net Operating Cash Flow, but less than JPM's Net Operating Cash Flow. BAC's Total Capital Expenditure is less than C's Total Capital Expenditure and JPM's Total Capital Expenditure. BAC's Free Cash Flow is greater than C's Free Cash Flow, but less than JPM's Free Cash Flow. This suggests that BAC is generating more cash flow than C, but less cash flow than JPM. BAC's cash flow generation is in line with the industry average.
  6. Growth and Future Prospects:
    • BAC's growth metrics are mixed compared to the peer group average. BAC's sales growth has been consistently higher than the peer group average over the past 5 years. BAC's net income growth has been consistently lower than the peer group average over the past 5 years. BAC's free cash flow growth has been consistently higher than the peer group average over the past 5 years. BAC's book value per share growth has been consistently higher than the peer group average over the past 5 years. BAC's return on average total equity growth has been consistently lower than the peer group average over the past 5 years. BAC's year-over-year growth rates have been volatile, particularly for free cash flow and free cash flow margin. BAC's 3-year CAGR for sales, net income, basic earnings per share, free cash flow, free cash flow margin, and return on average total equity are all greater than its 5-year CAGR for the same metrics. This suggests that BAC's growth has been accelerating in recent years. BAC's growth has been outpacing the peer group average for sales, net income, basic earnings per share, free cash flow, free cash flow margin, and return on average total equity. BAC's growth trends suggest that it is gaining market share and improving its competitive position. BAC's growth is balanced across different metrics. BAC's growth profile is positive.
  7. Potential for Investment:
    • BAC is a large and well-established bank with a strong market position and a history of consistent sales growth. BAC's cash flow generation is also strong, and its debt position is less leveraged than its peers. However, BAC's profitability and efficiency metrics are below both JPM's and the industry average. This suggests that BAC needs to improve its operational efficiency and cost management in order to be more competitive. Investors should consider BAC's growth potential, profitability, efficiency, financial stability, and valuation compared to both peers and industry benchmarks before making an investment decision.
  8. Key Risks and Considerations:
    • BAC's key risks include its lower profitability and efficiency compared to its peers and the industry average. BAC's higher debt leverage compared to the industry average also poses a risk. Investors should consider these risks before making an investment decision.
  9. Overall Assessment:
    • BAC is a large and well-established bank with a strong market position and a history of consistent sales growth. BAC's cash flow generation is also strong, and its debt position is less leveraged than its peers. However, BAC's profitability and efficiency metrics are below both JPM's and the industry average. This suggests that BAC needs to improve its operational efficiency and cost management in order to be more competitive. Overall, BAC is a financially healthy company with a strong market position, but it faces some challenges in profitability and efficiency.