Banking panic
The banking industry is faced with new challenges because of its exposure to Treasury bonds, which are losing value as a result of rapidly rising interest rates and dwindling deposits (which forces banks to sell the Treasuries at a loss). Among all the banks, Silicon Valley Bank (SIVB) was the first to go under and be taken over by regulators for this reason, bringing the issue to the public's attention. There was a deposit run on the bank when it reported losses for this reason and tried to make up for it with an equity offering.
Now the panic has spread to the banking industry at large, with even some of the big banks like Bank of America (BAC, Financial) and Well Fargo (WFC, Financial) losing more than 20% of their stock value and touching yearly lows of $27.68 and $38.75, respectively, on in the last few days.
The opportunity
The substantial decline in banking stocks could be an opportunity for value investors to invest in bank stocks that are selling at attractive valuations. Although most banks are trading well below their book value today, the regional banks do face the risk of failure. However, among those being sold off are the "too big to fail" banks. Among these, my top pick is Bank of America. I believe the management policies of Bank of America are aligned with its shareholders because of increasing dividends and share buybacks.
More assets means more interest income
To demonstrate one of the reasons why I like Bank of America, let's compare it to one of its main peers, Wells Fargo. At the end of 2022, Bank of America had about $3 trillion of total assets compared to $1.88 trillion for Wells Fargo. These assets include deposits worth about $1.93 trillion, as compared to $1.38 trillion for Wells Fargo. Wells Fargo is still subject to an asset cap following the 2016 fake account scandal, so this isn't really a fair comparison, but the point is that more deposits means more benefits from rising interest rates.
The risk is still there, but deposit inflows save the day
As reported in the 2022 annual report, Bank of America's marked-to-market unrealized loss was about $113 billion from its debt securities. Yet some of the depositors fearful and fleeing small regional banksplaced their deposits with Bank of America (again, too big to fail!), which reported an increase in new deposits of $15 billion over the past few days.
The minimum regulatory requirement for standardized Common Equity Tier-1 ratio (CET1 ratio) for banks is 9.5%. Bank of America has a CET1 ratio of 11.2% as compared to 10.4% for Wells Fargo in 2022. Therefore, although the unrealized loss of approximately $113 billion in held-to-maturity debt securities for Bank of America can have a significant impact on its CET1 regulatory requirements, it is unlikely that these securities would be sold at a loss when they mature. Moreover, because Bank of America has deposits close to $2 trillion and the loss from debt securities represents just about 5.8%, Bank of America should not need not to sell these securities and realize a loss any time soon.
Moreover, Bank of America's provision for credit losses reached $2.5 billion in 2022. The allowance for loan losses for Bank of America was $12.6 billion. These loan loss provisions were attributed to sluggish home loan growth and the slowing economy affecting revenues and net income in 2022. Bank of America achieved total revenue of $92.4 billion for the full year along with net income of $27.5 billion.
Berkshire Hathaway vote of confidence
I also find it encouraging that Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) has made Bank of America its second largest holding with 1.01 million shares representing 12.62% of the bank's common shares outstanding and 11.19% of its 13F portfolio as of the fourth quarter of 2022.
Valuation
Bank of America has 8.1 billion shares outstanding and is trading at a price of $28.35 as of this writing for a market cap of $231.7 billion. The total stock holder’s equity is $270.2 billion. The return on assets (ROA) of 0.90% is solid.
It could be argued that Bank of America has good investment prospects for value investors in my opinion because of its aggressive share buyback program and growing dividend policy. The Board of Bank of America authorized a $25 billion common stock repurchase program in 2021. In 2022, it repurchased $5.1 billion worth of common stock. After stock option compensation is factored in, the net three-year average share buyback ratio is 3.3%.
The annual dividend payout of $0.88 for Bank of America today yields about 3.04%. In the last five years, Bank of America has rewarded its shareholders by increasing its dividends at a growth rate of 14.87%.
All of this makes Bank of America the premiere value bank in my opinion, despite going through some loss in its held to maturity debt securities. As long as these losses remain unrealized, there should be no negative effects. Bank of America is also trading below its book value, another positive.
Bank of America conservatively manages its credit losses and risk, which is reflected in its financial performance.
