With Wells Fargo(WFC) - Get Report reeling from a scandal in which it opened two million customer accounts without permission and fired over 5,000 employees, it begs the question, will rival Bank of America(BAC) - Get Report follow WFC stock lower?
Bank of America(BAC) - Get Report is down close to 5% year-to-date as it fights to rally, following the Brexit referendum. While the stock rose just over 22% since the June vote, business conditions for banks remain quite challenging.
Let's take a closer look at the company and see whether you should continue to hold its stock or sell before a Wells Fargo-like scandal erupts. Read on to see which bank stock we've identified is a good buy now regardless of current scandals.
Bank of America's Recent Earnings Results
Bank of America released second quarter results on 7.18 and is slated to report third quarter results on October 17. For second quarter Bank of America posted $4.2 billion in net income, with an earnings-per-share (EPS) of $0.36. Total interest income was down 11% since the second quarter of 2015, along with a 3% drop in non-interest income. Total revenue, net of interest expense, was down just over 7%.
Bank of America's relative strength index (RSI) is at 59.59, suggesting the stock is close to being overbought. (Many view a 70% RSI as overbought and 30% RSI as undersold.) While optimistic analysts anticipate prices to reach $20.00, more conservative experts predict a target price of $15.00. Bank of America has room to fall, currently priced around at $15.50
The Chicago Board Options Exchange (CBOE) signaled some optimism on Bank of America. Last Monday, Angela Miles of CBOE reported bullish option trading for the bank with three calls trading for every one put. However, following market close on that same day, analysts received multiple dark pool indicator warnings of institutional selling; Bank of America stock has taken a dive since.
Wells Fargo: Recent Bad Behavior
News that Wells Fargo secretly created roughly 1.5 million bank accounts has generated outrage. The bank, taking responsibility, has put out statements that it regrets any instances in which a customer received a product that he or she did not request. The bank has agreed to refund $2.6 million to those impacted -- an average of $25 per customer -- and has eliminated branch-level sales goals that incentivized this behavior.
Banks are eager to sell additional products and services, like credit cards, mortgages, or well-management services to customers who have already opened a checking or savings account; it is not uncommon for banks to encourage employees to cross-sell. Some banks incentivize cross-selling by requiring quotas from employees or offering bonuses based on the number of additional products an employee sells.
Additionally, as banks have grown larger, the opportunity to cross-sell from other divisions is even stronger. The fact that cross-selling is such a top priority for some banks is so apparent that Bank of America Chief Operating Officer Thomas Montag even went so far as to wear a hat and T-shirt with the words "Cross-Sell" written boldly across both to a bank function.
Challenging Environment For Bank of America: Further Complicated
Now with Wells Fargo facing $185 million in fines, it raises the question as to whether similar unethical behaviors were happening at other banks. According to the head of the Consumer Finance Protection Bureau, the case is not necessarily indicative of a larger problem within the industry, but other experts argue that the political risk to Wells, JPMorgan, Citigroup, and Bank of America should not be underestimated.
In fact, Bank of America has faced criticism in the past for placing high pressure quotas on its employees. A report released in June 2016 by the National Employment Law Project listed the high stakes environment many employees were in to push additional products on customers. The report had several quotes from Bank of America employees including: "Managers really pushed me to ignore it when consumers say no" and "It's not a financial service position, it's a sales position. And that means it's not about the customer."
In addition, a look at a customer complaint database shows that issues of account openings and closings are not limited to Wells Fargo, thus raising the possibility that crackdown on this practice may take place at other banks too. Thousands of these complaints were lodged at major institutions, with Bank of America receiving the highest number of complaints (4,901), followed by Wells Fargo (4,450), JPMorgan (3,169), and Citi (2,260).
Bank of America: Faltering While Rival Morgan Stanley Stands Out
Shortly after the story on Wells Fargo was released, Bank of America was downgraded from buy to hold by Societe Generale. A number of other analysts have also recently updated performance guidance on Bank of America. Keefe, Bruyette & Woods downgraded Bank of America from an outperform rating to a market perform rating and reduced the price target for the stock from $17.00 to $16.00 in a research report on May 16. Additionally, Raymond James cut Bank of America from outperform to market perform on July 13.
While Bank of America is struggling amidst the Wells Fargo scandal and recent downgrades, strong peer Morgan Stanley(MS) - Get Report has hired two key executives from Bank of America's Merrill Lynch unit as it builds its digital offerings within wealth management. The hires come as Morgan Stanley is focusing on clients with more than $1 million in investable assets and increasingly referring those with fewer assets to online investing platforms and call centers. Morgan Stanley is also reportedly seeking new ways for technology-savvy clients to interact with their advisers, including texts and mobile apps. Investors are taking note of these positive changes. In the last month, Morgan Stanley shares have increased 7.72%, compared to an increase of 4.83% for Bank of America. Bank of America is falling behind Morgan Stanley, and its stock prices reflects its fall.
Despite The Dip, Bank of America Should Be Sold And Avoided
The recent scandal cost Wells Fargo $185 million to date; we anticipate that other financial institutions such as Bank of America will face ripple effects from the problems at Wells Fargo. At the very least this will put pressure on major banks to rethink the tactics they currently use to sell additional products to customers. This is particularly true for Bank of America, which has faced harsh criticism in the past for its methods.
Ultimately, Bank of America has not recovered, and with these new issues, we believe the stock does not present a buying opportunity at this time.
Current Bank of America shareholders should consider selling and buying Morgan Stanley.