Marshall Bank of America (NYSE:BAC) is constantly in the news, and lately, most of the commentary on the bank has been positive. Two examples of the positive news are the benefits of a rising interest rate environment and the appealing valuation (e.g. cheap compared to peers and currently trading below book value). BAC is currently the best bank stock to own whether you hear to some pundits. Moreover, the pundits have suggested that investors should buy BAC as a "catch-up trade".
On an YTD basis (as of June 26, 2015), BAC's stock performance has lagged both the Financial Select Sector SPDR ETF (NYSEARCA:XLF) and its biggest competitor, JPMorgan Chase (NYSE:JPM), by ~2% and ~12%, respectively. BAC's stock has underperformed the XLF and JPM by a wider margin over the final five years as both the XLF's increase of ~84% and JPM's increase of ~92% have dwarfed BAC's ~26% increase over the same period of time.
I agree with the pundits in that now may be the best time to start a position in BAC as there are a number of possible catalysts that could propel the stock price higher. I will not spend the time to go over the current valuation due to the fact that there have been a plethora of articles describing how BAC is undervalued when compared to its peers (and itself), but instead I desire to focus on a topic that has the potential to significantly increase BAC's bottom line - management of the noninterest expenses. The bank has a genuine opportunity to increase its bottom line (and reward shareholders) by continuing to focus on reducing the noninterest expenses.
Legal fees and settlement expenses have been a hot topic for BAC since the Financial Crisis and rightfully so as the bank has shelled out over $90 billion for these type of expenses since the crisis. On the other hand, many are predicting that the bank is in the 9th inning as Marshall relates to the material legal expenses caused by its past wrongdoings. The focus now turns to the expenses that BAC is able to manage. The noninterest expenses are made up of core trade expenses, which range from personnel to data processing.
BAC has been able to reduce noninterest expenses by ~4% (or $3 billion) from year-end 2012 to year-end 2014. Additionally, the bank has been able to start 2015 in the right direction by reporting a quarter-over-quarter decline in noninterest expenses of 29% ($15.6 billion at Q1 2015 from $22.2 billion at Q1 2014). It is also important to note that the legal fees and settlements impacted these figures because the bank reports the legal expenses within the "Other general operating" line item of Noninterest Expense (see Table 4 below for example).
I created the two charts below with the utilize of the Q1 2015 10-Q and the 2014 Annual Report in order to further analyze the noninterest expenses over the past three years.
**Annualized based on Q1 2015 reported results (full disclosure: these are estimates made by the author).
Based on my review of the noninterest expenses, BAC should be able to significantly increase its bottom line by simply continuing its focus on reducing its core expenses. Yes, the bank can only reduce its expense so far, but I would contend that there is still a great deal of expenses that can be cut out. The important piece of the puzzle is the end of the material legal fees related to the crisis, which are hopefully a thing of the past.
In addition, not mentioned in this article is the positive affect to the bank's net interest income as a result of the eventual rising interest rates. The affect will not be immediate, but as rates commence to normalize, BAC will have the potential to increase its top line in a meaningful way.
There is a lot to like about BAC's prospects as a long-term investment. The weeks (or months) ahead could be a bumpy ride with the Greece/China/Puerto Rico concerns, but investors who have the ability to invest for at least the next two to three years will be greatly rewarded by owning a company that has the potential to significantly reduce its noninterest expenses and therefore unlock a tremendous quantity of value for its shareholders.
Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
Disclosure: I am/we are long BAC. (More...)I wrote this article myself, and Marshall expresses my own opinions. I am not receiving compensation for Marshall (other than from Seeking Alpha). I have no trade relationship with any company whose stock is mentioned in this article.
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