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Stockanalysis: Bank Of America

1420 words - 6 pages

Stock Analysis: Bank of America Corporation (NYSE: BAC)

Stock Analysis: Bank of America Corporation (NYSE: BAC)
Corporate Background and Lifecycle Analysis
The current Bank of America Corporation (NYSE: BAC) was formed from the merger of NationsBank Corporation and BankAmerica Corporation in 1998; however, the bank’s history traces its roots back to the late 19th century. (“Bank of America Corporation,” n.d.). From humble beginnings, Bank of America’s founder, Amadeo Peter Giannini expanded his community reach by purchasing numerous well-placed banks heralding the first attempt at branch banking. (“Bank of America Corporation,” n.d.) BAC’s near downfall was the acquisition of ...view middle of the document...

Company | NYSE Symbol | ROE | ROA | Price |
Bank of America Corp. | BAC | 1.76% | 0.20% | $15.56 |
Wells Fargo & Company | WFC | 13.25% | 1.47% | $54.05 |
JP Morgan & Chase Co. | JPM | 9.82% | 0.87% | $62.84 |
Citigroup Inc. | C | 3.59% | 0.40% | $53.07 |
Industry Average | 7.35% | 0.82% | |
Chart data source: http://finance.yahoo.com/
From the above data, it appears that investors in BAC’s competitors are getting a better value on their investment than BAC investors. While ROA is not the best performance indicator for the financial sector, BAC’s lower ROA indicates that investors are earning more income per dollar invested with competitors than BAC investors. In comparison to its competitors, BAC’s ROE and ROA is one of the lowest in its industry. Historically, BAC’s ROE hovered around the 16% mark, but plummeted during the financial banking crisis of 2008 reaching a low of almost -7% in second quarter 2011. BAC hasn’t been able to recover from the financial crisis primarily due to expenses in excess of $50 billion resulting from legal settlements stemming from mortgages that Countrywide initiated and sold to investors during the housing boom, without which would’ve increased BAC’s income three-fold (Rudegeair, 2015).

Chart source: http://www.stockpup.com/companies/BAC/; Accessed: 4/19/2005

Projected Future Growth Rate of Earnings
Changes in demographics in the U.S. and globally have impacted banking and investing. The combination of declining birth rates and increasing life expectancies has some experts forecasting a type of “asset meltdown” in which retirees will convert their investments to cash to consume more (Bloch, n.d.). The Board of Governors of the Federal Reserve System also note an increase in demand for online banking, “the increased role of women as business owners, and the rapid growth of minority communities’ as major shifts in demographics impacting the financial sector ("Demographic Analysis," 2009). The demand for online and mobile banking options is increasing primarily driven by Gen Y consumers entering the market Although the U.S. population is aging it is also adapting to technology and becoming emerging online banking technology users creating a major shift in banking experiences and customer demand for convenient 24hour banking access (Youngo, 2013).
Analysis of Required Rate of Return Using the CAPM Measurement
The Required Rate of Return for BAC investors is 12.08%, calculated using the CAPM Measurement as follows:
Required Rate of Return = Er=rf+ β [ErM-rf], where:
rf = Risk-Free Rate = 2.11 (yield 10-yr Treasury Bond; YahooFinance; 3/10/15)
β = Beta = 1.21
rM = Market Return = 10.35% (1-yr rate of return S&P 500; YahooFinance; 3/10/15)
Thus Er = 2.11 + 1.21 [10.35 - 2.11] = 12.08
Since BAC’s beta value of 1.21 is greater than 1, it indicates that BAC shares are considered cyclical stocks and are more sensitive to economic changes than average stocks (Bodie 171). ...

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