Bank of America closed at $5.49 today.
Im so tempted to buy it. But let's review its fundamentals to put our decisions in line.
BofA is one of the largest financial institution in the U.S. and of the world. Its size can be viewed both as an opportunity and a problem. It offers a wide spectrum of services and products from asset management, consumer loans to wealth management and investment banking. It means they can very well execute economies of scale and achieve cost advantages. But then historically, institutions of this size have proven difficult to manage , and what's dragging the BofA further down is its $2 trillion in mortgages when it acquired Countrywide in 2008.
BofA needs to raise capital for the next several years to comply with Basel III. As of June 30,2011, BofA's balance sheet held $1.4 trillion in risk-weighted assets, with only $115 billion in Tier 1 common capital. Risk-weighted assets will increase substantially under Basel III, while certain items will be deducted from capital. These changes will reduce the company's 8.2% Tier 1 common equity ratio, making it harder for the company to reach the 9.5% + ratio it hopes to achieve.
Finally, aside from BofA's problems of possible legal claims and erosion of capital (which are considered serious even when operating in a stable market environment), the bank is facing the same headwinds as other financial institutions. Demand for loans remains weak. Low, flat yield curve would result to lower interest margins. And its wide consumer base makes it vulnerable to the continued deleveraging in the U.S..
But looking at the charts, it is at its lowest range now. And its P/E ratio is at 3, compared to the P/E ratio of its peers at 9. This stock is indeed cheap now. But should you decide to invest in BofA stock, prepare yourself for a rough roller coaster ride. Every time there is a court battle over the mortgage claims of investors, this stock will dive. And then at quarter end, when it announces its earnings, its price will rise again. Some would see this as a frightful scenario, especially if you start computing its financial ratios that include the standard deviation. But for some, this is an opportunity to make some money.
Good luck!
Im so tempted to buy it. But let's review its fundamentals to put our decisions in line.
BofA is one of the largest financial institution in the U.S. and of the world. Its size can be viewed both as an opportunity and a problem. It offers a wide spectrum of services and products from asset management, consumer loans to wealth management and investment banking. It means they can very well execute economies of scale and achieve cost advantages. But then historically, institutions of this size have proven difficult to manage , and what's dragging the BofA further down is its $2 trillion in mortgages when it acquired Countrywide in 2008.
BofA needs to raise capital for the next several years to comply with Basel III. As of June 30,2011, BofA's balance sheet held $1.4 trillion in risk-weighted assets, with only $115 billion in Tier 1 common capital. Risk-weighted assets will increase substantially under Basel III, while certain items will be deducted from capital. These changes will reduce the company's 8.2% Tier 1 common equity ratio, making it harder for the company to reach the 9.5% + ratio it hopes to achieve.
Finally, aside from BofA's problems of possible legal claims and erosion of capital (which are considered serious even when operating in a stable market environment), the bank is facing the same headwinds as other financial institutions. Demand for loans remains weak. Low, flat yield curve would result to lower interest margins. And its wide consumer base makes it vulnerable to the continued deleveraging in the U.S..
But looking at the charts, it is at its lowest range now. And its P/E ratio is at 3, compared to the P/E ratio of its peers at 9. This stock is indeed cheap now. But should you decide to invest in BofA stock, prepare yourself for a rough roller coaster ride. Every time there is a court battle over the mortgage claims of investors, this stock will dive. And then at quarter end, when it announces its earnings, its price will rise again. Some would see this as a frightful scenario, especially if you start computing its financial ratios that include the standard deviation. But for some, this is an opportunity to make some money.
Good luck!
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