NEW YORK (TheStreet) -- Bank of America's (BAC - Get Report) pending $17 billion settlement to make its biggest remaining mortgage-related legal woes go away will let the bank's executives focus on the present and the future again. And not a moment too soon, because BofA has plenty of work to do.
Even if the settlement details are announced by early next week, as expected, investors will have to consider whether they really want to own shares in a bank that is still presiding over a shrinking base of loans -- in an economy the grew 4% in the second quarter -- and is still being held back by low interest rates.
The ideal way a bank makes money in an expanding economy is to make more loans and book wider spreads between the interest rates it pays for deposits and other funds and those it collects from borrowers and other clients. Fee income and trading income round out the picture.
But those core basics are still not going B of A's way -- instead, as rivals like Wells Fargo (WFC) begin to see loan growth, Bank of America saw its loan base shrink a little less than 1% in the second quarter. Net interest margin dropped 4 basis points to 2.22% at BofA, reflecting low rates that are hurting all banks.
However, Wells saw loans grow 4% and JPMorgan Chase (JPM) had much faster growth in commercial and construction lending, which are central to the cyclical case for banks now.
Even with the settlement, there are better bank stocks than B of A to be had.
While bank-stock boutique Keefe, Bruyette & Woods says 77% of the banks it follows beat or met earnings expectations in the second quarter, Bank of America's second-quarter miss sent estimates for this year's profits down 15 cents a share, to 79 cents. About two-thirds of that represents one-time charges. The most worrisome part is the nickel a share that reflects failure to seize the economic momentum that's building.
No bank on the Street projects that Bank of America's stock, now near $16, will be much above $22 in a year, and the mean estimate is $18. Even the bank's own longer-term projections don't support an aggressive case for growth, CLSA banking analyst Mike Mayo has argued. Instead, the near-term plan is to pacify investors by boosting dividend payments and boost profits by cutting costs.
These are the marks of a stable bank, but not a once-more thriving one. Stable may be good enough for regulators, whose job is to make sure BofA and other large banks don't fail in some future crisis. And playing for stability, modest growth and cost control may be the right plan for Bank of America now.
But the cyclical growth that stock investors want to see isn't on the horizon yet, settlement or no settlement. Wells is getting there faster, and bank stocks in general have trailed the market for the past year. Just because CEO Brian Moynihan's plan is right for where the bank is now, doesn't make Bank of America shares the best bet for potential shareholders.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BANK OF AMERICA CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate BANK OF AMERICA CORP (BAC) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its attractive valuation levels, expanding profit margins and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The gross profit margin for BANK OF AMERICA CORP is currently very high, coming in at 86.47%. It has increased from the same quarter the previous year. Despite the strong results of the gross profit margin, BAC's net profit margin of 9.28% significantly trails the industry average.
- Regardless of the drop in revenue, the company managed to outperform against the industry average of 8.2%. Since the same quarter one year prior, revenues slightly dropped by 5.1%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Commercial Banks industry and the overall market on the basis of return on equity, BANK OF AMERICA CORP underperformed against that of the industry average and is significantly less than that of the S&P 500.
- BANK OF AMERICA CORP's earnings per share declined by 40.6% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, BANK OF AMERICA CORP increased its bottom line by earning $0.91 versus $0.25 in the prior year. For the next year, the market is expecting a contraction of 12.1% in earnings ($0.80 versus $0.91).
- You can view the full analysis from the report here: BAC Ratings Report