- Bank of America has overtaken Wells Fargo as the favorite big bank of investors.
- The book value is not yet equal to equity, but that gives BAC more room to run.
- The former Merrill Lynch makes it stronger than Wells in investment banking.
Nearly all large bank stocks rose on Friday, as traders were caught on the wrong side of a strong jobs report. But Bank of America (NYSE:BAC) did best, rising nearly 4% and flirting with $18/share.
The report that 271,000 jobs were created in October, 268,000 of them in the private sector, and that the U.S. jobless rate is now down to 5%, is expected to lead the Federal Reserve to raise interest rates by the end of the year, if only by 25 basis points. The Fed is nervous about remaining at the “zero bound” of interest rates, and wants normalcy that announces a recovery from the Great Recession and its emergency measures.
What does this have to do with bank stocks? If the cost of money from the Federal Reserve becomes real, other interest rates can rise, and spreads – the difference between what money costs and what you can get for it --- should start to widen. That means more profit for banks.
During the recovery period, Wells Fargo (NYSE:WFC) has been the favorite among the big banks. It has doubled in value over the last five years. Full disclosure: I have some WFC in my retirement account.
But Wells Fargo is no longer the favorite big bank stock among traders. That honor now goes to Bank of America, the long-battered bank based in Charlotte, NC that wound up acquiring Merrill Lynch during the 2008 meltdown, and which wound up with Countrywide Finance, one of the biggest victims of the mortgage meltdown.
And that is why BAC is so favored now. New mortgages are a good business. The credit quality is high. Bank of America also has a very strong branch banking network, with over 5,000 branches. Even as more banking moves online, a large branch network can be an advantage. Investment banking is also profitable again. Thanks to the former Merrill, Bank of America is now much bigger in investment banking than Wells.
With the quality of its assets rising, and with the dollar so strong, Bank of America should also have further to go than its peers. Its price-to-book value is still under .80, meaning the stock is valued for 20% less than the book value of its assets. By contrast the price-to-book at WFC is nearly 1.7.
When banks were weak, this meant Wells was the play. Now that banks are strong again, the bank that was formerly weak is now thought to be strong. It has further room to run.
A steadily-strengthening balance sheet, a strong currency as a tailwind, and room to run means Bank of America stock could easily hit $20, and go beyond it, by Christmas. That’s more than 10% ahead of where it is now.