Indications Of Turnaround Sparks Buying Interest In BoA
The Bank of America (BoA) shares, which closed at $12.16 on Tuesday, have declined almost 30% so far in 2016. After battling the 2008 financial crisis successfully, the bank is again focusing on the dividend. However, the latest dividend payment of $0.05 per share is still a far cry from the $0.64 per share paid in 2007.
The bank currently allocates 15% of earnings as dividends. Still, it is far less than the historical payout percentage. Considering the fact that the payout percentage of several banks (Lloyds banking group is targeting a payout of 70% of its earnings) are between 40% and 50% of the earnings, there is a lot of scope for an increase in the future.
Fundamentally, the bank has started performing well. The fiscal 2015 earnings per share was $1.31. The net income for the fiscal 2015 increased to $15.9 billion from $4.8 billion in the prior year similar period.
The most important aspect of the results is that there were no legal fines or out of court settlements during the entire fiscal 2015. Between 2008 and 2015, the BoA had spent more than $50 billion to resolve legal issues. This includes $16.65 billion settlement with government regulators, $9.5 billion settlement with the Federal Housing Finance Agency, $11.2 billion in relief to Fannie Mae and $8.5 billion settlement with 22 private institutional investors.
A recent ruling by the New York’s highest court bars all claims brought after six years from the date the representations and warrants were made. Thus, we can expect that the bank will not face any more new claims related to last decade’s credit/housing bubble.
The shares of the bank are currently trading at 61% of the book value. This would certainly attract value investors. The bank is also expected to turn aggressive in their buyback program. Analysts argue that the bank’s lower return on equity of 6.26% is the prime reason for the lack of investors’ interest. The market generally expects the return on equity ratio to be around 10%. However, it should be noted that the return on equity has increased from 1.70% in the fiscal 2014.
The efficiency ratio of the BoA was about 89.2% in fiscal 2014. However, it has improved to about 65% in the fourth-quarter of fiscal 2015. Top rated banks such as JP Morgan Chase and Wells Fargo have an efficiency ratio of about 60% – to record, the lower the better. The ProjectNewBAC, initiated in 2011, has reduced the annual expenses by $8 billion.
Considering the above discussed facts, it can be understood that the stock price and the bank’s performance are moving in opposite directions and it won’t take long for the market to change its course.
Technically, as shown in the image below, the stock has technical support at $12.
A crossover above $13.5 would take the stock to $15 or even $17 in a short span of time. Thus, a binary options trader should purchase a call option contract with March end expiry. The suggested strike price for the call option contract is $15.