Introduction
In this report, the Bank of America Corporation (BAC) share price is analysed in the context of the current economic situation and the company’s performance. The latter is described through the analysis of the company’s financial statements and is compared to the performance of the primary BAC competitors.
In terms of the industry, BAC is in an extremely strong position; still, the current performance of the company is worse than would be expected. The beta of BAC demonstrates that its share price is relatively stable, and significant changes are not to be expected in the near future. At the same time, given the air of uncertainty that is characteristic of the current economic situation, both the drop and the increase can occur, which is why “hold” proposition appears to be the most reasonable option.
Economy: General Overview
Global Economy
The importance of the economic context for the investment decision development has been highlighted, for example, by Damodaran (2006), Bodie, Kane and Marcus (2011), Bloom (2014), or Lofthouse (2001) as a part of fundamental analysis. Indeed, the changes on the micro- and macroeconomic levels tend to affect the performance of most companies. Consequently, determining the specifics of current global and domestic economic situation may be helpful for an investment decision.
According to the Bank of America Corporation [BAC] (2015a), throughout 2014, the economic growth of the major markets appeared to be modest and uncertain, with Japanese market contracting, Greek problem destabilising the eurozone, and Russia suffering from the sanctions and oil prices drop (BAC 2015a, p. 20).
The United Nations [UN] (2015) confirms that the global economic expansion rate has been 2.6% in 2014, which is lower than the precrisis level (p. 5). The monetary policy adjustments that are being made, for example, in Japan and China, can increase instability (UN 2015). The pre-crisis international trade rates are still not achieved, and even though they are projected to proceed with the “sluggish growth”, risks the geopolitical conflicts undermine this possibility (UN 2015, p. 6).
Indeed, the situation in the market can be determined by non-economic factors as well, particularly those that can be classified as “bad news” (Bloom 2014, pp. 161). UN (2015) confirms that the political conflicts of the recent months contribute to the restriction of the global economic growth. The actions of ISIS and the recent terrorist attacks are among these conflicts.
Indeed, apart from the direct damage to the property, such outbursts can significantly harm tourism and create a decline in consumption as people grow wary of visiting downtowns. Apart from that, these events almost definitely result in increased security expenses and can potentially damage international trade if national borders become less open (Buttonwood Column 2015; Laird 2015).
All these problems are the direct effect of terrorism on the economy and are expected to be relatively short-lived (Buttonwood Column 2015) Apart from that, the growing anxiety (if not panic) contributes to the general feeling of uncertainty and insecurity, which also tends to reduce the investment activity (Laird 2015; Bloom 2014). Therefore, the current global economic situation will be significantly affected by this sense of insecurity.
Another global economic problem is the oil prices decrease. The increase in the US oil production, which has led to the decline in oil prices, might be considered a plus from the political point of view as it reduces the oil-trading possibilities of ISIS (Chafuen 2015).
Apart from that, the reduction is obviously beneficial for the customers, but, in other respects, lower oil prices damage the global economy. This damage is primarily caused by the difficulties experienced by the oil industry that include, for example, the reduction of employment in the sector as well as the decrease in wages (Kawa 2015).
The UN (2015) forecasts are uncertain: while the possibility of further economic growth is pointed out in the report on the world economic prospects, it is also highlighted that there exist “significant downside risks” for the developed countries, especially European ones and Japan (p. 5). In general, it can be concluded, that the global economy is currently in a state of uncertainty, and many challenges need to be taken into account.
US Economy
According to BAC (2015), throughout 2014, the US economy was still recovering from the Great Recession, but the significant figures were showing some improvement. Those include the GDP growth that has reached 2.3%, the decrease in the unemployment rate (5.6%), and the growth of consumption (BAC 2015a, p. 20).
In the third quarter of 2015, the GDP of the US increased by 2.1% and the personal disposable income grew by 0.4 %; the US net investment position, however, proceeds to be characterised by liabilities exceeding assets (US Bureau of Economic Analysis 2015). The UN (2015) encourages the Federal Reserve to adjust the interest rates that are indeed expected to be increased; the outcomes of this decision are still unclear (Eavis & Picker 2015; Kaletsky 2015).
Other significant features of the US economy, as Chafuen (2015) points out, include the increase in the US debt and the disputes over the healthcare policy of the President. The latter has a significant impact on the economy of the country including the reduction of productivity and the increase in the full-time employment cost.
Still, in general, the economic situation in the US appears to be more stable and positive-looking than that of the world, even though the aftermaths of the crisis are still noticeable. At the same time, it should be pointed out that the UN (2015) is cautious about making predictions before the interest rates increase. Therefore, it can be concluded that the economic situation in the US is also somewhat vague, especially in the light of the global economic uncertainty.
Bank of America Corporation
BAC: Overview
Founded in 1874, BAC is an international company that offers products and services in the following segments: “consumer and business banking, consumer real estate services, global wealth and investment management, global banking, and global markets” (BAC 2015a, p. 16; Bloomberg Business 2015).
As of 2014, BAC serves about 80% of the US population as it operates in 50 states; apart from that, the company is operating internationally in 35 countries; the total number of the company’s customers amounts to 48 million consumers and 4,800 baking centres (BAC 2015a, p. 20).
The primary competitors of BAC are the JPMorgan Chase & Co, Wells Fargo & Company, and Citigroup Inc. Currently, BAC outperforms the latter in the terms of most ratios and parameters, including the market cap, quarterly revenue growth, net income, and price-to-earning ratio.
Concerning the latter ratio as well as quarterly revenue growth, BAC also outperforms JPMorgan Chase & Co (12.85 as compared to 11.35), but in relation to other parameters, BAC is performing less successfully than the two other organizations (Yahoo Finance 2015a).
According to Forbes (2015a), BAC ranks #11 in assets and #37 in market value among the world’s biggest public companies. It is also among Forbes (2015a) Most Valuable Brands list ranked #72. To compare, Wells Fargo is ranked 10 in the list of the biggest public companies (Forbes 2015b). These facts show that BAC competes with the strongest players in the market and is being successful.
Still, as can be seen from the company’s financial statements, BAC has been underperforming recently. Since the crisis, the profitability ratios of the company have been decreasing, which is natural. At the same time, the data per common share and efficiency ratios have been growing: for example, the return on equity increased from 0.96 in 2011 to 7.13 in 2013 (BAC 2015, pp. 25). In 2013, all the mentioned ratios increased, but in 2014, performance worsened again.
Still, in the terms of efficiency, the 2014 ratios outperform those of the years before 2013 (for example, the return on equity in 2014 equals 2.92). At the same time, it should be mentioned that the long-term debt of BAC has decreased by 3% and total liabilities have decreased 4.5%. According to BAC (2015) this is the result of the company’s intent to decrease its long-term debts and short-term borrowings (p. 25).
Investment-relevant conclusions from the data are presented in the following sections.
BAC: SWOT
SWOT analysis is concerned with determining the company’s strengths, weaknesses, opportunities, and threats. The first two factors describe the company’s inner state while the second part is concerned with the outer influence (Lofthouse 2001, pp. 126-127).
The SWOT analysis has been extremely popular as a strategic planning tool due to its advantages: the analysis, which is easy to perform, allows one to have a look at the company’s state and define the areas that require attention along with areas that can provide the necessary options and resources.
At the same time, the analysis has been criticised for its disadvantages that include excessive simplicity, vagueness, generalization, and subjectivity of the factors choice (Helms & Nixon 2010, pp. 234-235).
However, it should be pointed out that all these disadvantages are the innate qualities of SWOT; in other words, the tool is not meant to provide the detailed scheme of a company’s position. The SWOT overview can provide the information about the company’s position and future possibilities, which is necessary for this report. The subjectivity of the analysis, however, stays a significant limitation to the analysis.
The strengths of BAC are numerous: they include its size, which presupposes a sufficient amount of resources; its age and the consequent experience; its reputation and brand that attract customers. It should be separately pointed out that the brand of the company is very likely to attract American customers.
Another advantage is the Merrill Lynch, once acquired by BAC, that is now considered to be #1 investment research team (Gasparino 2008; BAC 2015a). The efficiency ratios for the company are quite high; they also suggest that BAC management is quite competent.
For the point of view of weaknesses, it should be mentioned that the performance of the company has been deteriorating. This factor is a symptom rather than the weakness itself, but it can signify the weaknesses that would be visible to an insider. Given the facts that the BAC financial report provides numerous reasons for the performance deterioration, both internal and external, this report will consider the performance itself as a weakness that needs to be eliminated.
Another potential weakness is the company’s reliance on the US market. Still, since BAC has already been expanding into other countries, it can be concluded that the said reliance is not too significant. At the same time, it is obvious that the Bank of America is most popular in the US, and not in other states.
The most obvious opportunities of BAC include expansion, primarily, the expansion into other countries and the development of the already penetrated ones to decrease the company’s reliance on the US market. Apart from that, BAC is known for fast expansion through acquisitions and has been successfully carrying out this line of action (Gasparino 2008).
The major threats to the BAC, naturally, include the consequences of the crisis and the competition. The latter has been described, and it is obvious, that BAC is performing well, even though the competition is capable of reducing its chances for improved performance.
As for the crisis, while the economy of the US is recovering, the problems are still reflected in the consequences that include reduced consumption or lower investment activity (Bloom 2014). These threats need to be managed appropriately, and a giant company like BAC has all the resources to do so.
BAC: Share Price Analysis
BAC share price is currently $17.43, with the market cap amounting to $181.49 billion (Yahoo Finance 2015a). The share price has been growing, albeit unsteadily, since its rather significant post-crisis fall; the close price in 2014 was $17.89, which is lower than the highest price of 2010, but higher than its close price (BAC 2015a).
With the help of historical share prices for the past three years and those of NYSE Composite, the beta of BAC share was estimated to range between 0.52 and 0.82 (Bank of America Corporation 2015b; Yahoo Finance 2015b). It is optimal to compare the beta of a company to a benchmark for the industry (Damodaran, 2006). According to Damodaran (2015), this figure ranges from low to normal for the banking sector in the US (that is 0.81).
Lower-beta stocks are less risky; therefore, it can be concluded that BAC is relatively stable, especially when compared to the industry (Bodie, Kane & Marcus 2011, p. 577; Damodaran, 2006). This factor may suggest that extreme growth of the price is not to be expected, but it could be regarded as a particularly positive one in the context of the current economic situation. Indeed, in the situation of uncertainty, caused both by economic and political upheavals, people are likely to seek stability.
In this respect, BAC has all the advantages needed: it is a long-existing bank with high reputation and a brand name that is bound to attract American customers at the very least. Therefore, if the current uncertainty existing in the market is going to affect the prices of BAC shares in any way, the way is most likely to be positive.
The lowering profitability of the company is a much less appealing factor. It is alleviated by the fact that the liabilities of BAC are being reduced purposefully, and that the efficiency ratios are growing in comparison to the previous years (with the exception of the year 2013).
The income decrease can be explained by the aftershocks of the recession as well as the new political and economic shocks. As BAC (2015a) determines it, the numerous reasons for the deteriorating performance include increased expenses (in particular, concerning market-related premium amortization) and decreased consumer loan balances.
In general, the performance of the year 2013 allows one to suggest that BAC is capable of recovering after the recession; the reputation, experience, and brand name of the company all contribute to this impression. It should be pointed out that the company is performing well in terms of the industry, competing with the world’s largest banks and outperforming some of the competitors in a number of parameters.
Therefore, it can be concluded, that the shares of the company would not be expected to drop significantly as a result of deteriorating performance, and the performance is not unlikely to improve in the future.
Given the strength of the company’s position, its share price is unlikely to decrease dramatically despite all the mentioned challenges. At the same time, and the next year is more likely to demonstrate how the company is coping with the new difficulties caused by the slow growth of the economy and political upheavals.
In this report, it is concluded that the BAC share price has all the chances of increasing or decreasing by a relatively small amount in the next year depending on the way it will respond to the new global economic challenges; therefore, the proposition for it would be to hold.
Conclusion
The current economic situation is rather unfavourable than favourable, and the challenges that it poses have to be met appropriately. An old, reputed, large international company like BAC is perfectly capable of managing the upcoming threats.
The performance of the company has been somewhat deficient, which, however, is the tendency of the world economy nowadays, and, in the terms of the industry, BAC is among the most successful banks. The new year, however, can be characterised by the high uncertainty and anxiety caused by economic and (mostly) politic upheavals. Therefore, as a result of the global uncertainty, the proposal suggested in the report is to hold.
Reference List
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