If you're in the market for a bank stock to buy in November, you could do a lot worse than Bank of America (NYSE:BAC). While the nation's second biggest bank by assets has seen its stock price soar over the past year, the still-modest valuation of its shares makes them an attractive proposition at their current price.
THE BANK OF AMERICA PLAZA IN DALLAS, TEXAS. IMAGE SOURCE: GETTY IMAGES.
Bank of America's stock valuation
Bank of America's shares trade right now for 15.8 times its expected earnings over the next 12 months. One way to interpret this is that it costs $15.80 to buy every $1 of the Charlotte, North Carolina-based bank's forward earnings. That's by no means cheap, a moniker typically associated with a single-digit valuation multiple, but it's also not expensive.
You can get context for Bank of America's valuation by comparing it to other bank stocks. On the KBW Bank Index, which tracks shares of two dozen large-cap bank stocks, the average bank trades for 16.9 times expected earnings over the next year. All told, Bank of America's stock ranks in the middle of the pack, with nine banks on the index having lower forward price-to-earnings multiples.
Another useful point of comparison is the S&P 500, a large-cap stock index that traces the shares of the 500 biggest and most profitable companies in the United States, regardless of sector or industry. The average multiple on the S&P 500 right now is 19.5, according to The Wall Street Journal.
Bank of America's fundamental performance
It isn't just Bank of America's valuation that looks promising; the bank's fundamental performance is headed in the right direction as well. This was evident in the third quarter, in which Bank of America's net income increased to $5.6 billion. That was 13% higher than the year-ago period.
Bank of America has accomplished this in large part by radically cutting expenses. In 2011, for instance, its total noninterest expense added up to $76 billion. By last year, this figure was down to $55 billion. And Bank of America isn't done in this regard; it's on track to reduce its annual operating expenses to $53 billion by next year.
As a result, Bank of America has become a much more efficient bank. For two consecutive quarters, its efficiency ratio has come in below 60%, meaning it spends less than 60% of its revenue on operating expenses. This marks the achievement of one of the bank's principal performance targets.
Relatedly, Bank of America has also seen its profitability steadily improve. Its third-quarter return on assets, which measures a bank's net income as a percent of total assets, came in at 0.98%compared to 0.90% in the same quarter last year. That's the closest Bank of America has come to the standard industry benchmark of a 1% return on assets since the financial crisis.
In short, investors would be excused for concluding that Bank of America's stock offers an attractive proposition at today's price. They're reasonably valued, and the bank's fundamental performance is consistently improving.
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