Bank of America (BAC) Buy Pitch


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Bank of America (BAC) Buy Pitch

  1. 1. Bank of America (BAC) Buy Pitch Anthony Vitiello November 6, 2006
  2. 2. Proposal <ul><li>Purchase 200 Shares of Bank of America (BAC) for a little less the $11,000 </li></ul><ul><ul><li>Current Price: $53.85 </li></ul></ul><ul><ul><li>BCIC Cash Position: $43,000 </li></ul></ul>
  3. 3. Why should we buy? <ul><li>-Strong growth in a negative rate environment; fee income </li></ul><ul><li>- Credit Cards in China </li></ul><ul><li>- Has the ability to redefine the areas it competes in at will , such as online trading </li></ul><ul><li>- When rates normalizes, the factors allowed the </li></ul><ul><li>bank to perform now, coupled with more </li></ul><ul><li>profitable rates will lead BAC to outperform </li></ul>
  4. 4. Rates, Yield Curve <ul><li>Banks try to charge greater interest on the money they loan compared to the interest they pay for deposits, earning a spread on every loan </li></ul><ul><li>Banks purchase money in the short term and loan money in the long term at rates set by the bond market </li></ul><ul><li>When the bond market yield curve is inverted (short rates higher then long rates), money costs more, spreads get smaller, profits decrease </li></ul><ul><li>The higher the overall rate, the greater the cost to borrower, the less the incentive to borrow </li></ul>
  5. 5. Current Yield Curve Even though the yield curve is nearly flat, the slightly higher rates between the 3mo and the 3yr is significant
  6. 6. Overview <ul><li>Bank of America is the second largest bank in the US by assets with $1.445 trillion </li></ul><ul><li>The company is divided into four segments </li></ul><ul><ul><li>Global Consumer & Small Business (GCSB) </li></ul></ul><ul><ul><li>Global Corporate & Investment Bank (GCIB) </li></ul></ul><ul><ul><li>Global Wealth & Investment Management (GWIM) </li></ul></ul><ul><ul><li>Other (Private Equity, Venture Capital, etc.) </li></ul></ul>
  7. 7. Segment Breakdown
  8. 8. Financial Data <ul><li>In Q3 BAC earned $1.22 a share; REVENUE= $ 10.4 bil., INCOME= $5.42 bil. </li></ul><ul><li>Current Ratios </li></ul><ul><ul><li>Return on assets= 1.56% YTD {Return excl. leverage} </li></ul></ul><ul><ul><li>Return on Equity= 17.09% YTD {Returns incl. leverage) </li></ul></ul><ul><ul><li>Efficiency Ratio= 46.81% YTD {Measure of how much money is lost to expenses; below 60 is desirable} </li></ul></ul><ul><ul><li>P/E Ratio= 10.86 (Forward) </li></ul></ul><ul><ul><li>PEG= 1.28 (Forward) </li></ul></ul>
  9. 9. Industry Comparison
  10. 10. Competitive Advantages of Other <ul><li>On August 24, BofA sold its Asian unit to China Construction Bank for 1.25bil </li></ul><ul><li>This deal helped BofA with its relationship with the Chinese government. </li></ul><ul><li>On Tuesday, the bank rolled out a test program; free wire transfers between San Francisco banks and banks in China; shows that BofA is working hard to get to into China </li></ul>
  11. 11. Competitive advantages of GCSB <ul><li>Following merger with MBNA, Bank of </li></ul><ul><li>America is top credit card issuer </li></ul><ul><li> in the US. </li></ul><ul><li>$175 million ahead </li></ul><ul><li>in cost savings; one quarter </li></ul><ul><li>left in the year </li></ul><ul><li>Credit cards issued have a </li></ul><ul><li>interest margin on average of </li></ul><ul><li>13.38%, the highest of all BofA </li></ul><ul><li>products, new size creates </li></ul><ul><li>economies of scale </li></ul>
  12. 12. Competitive advantages of GCSB contd. <ul><li>Issuing Credit Cards in China, a potential market of over one billion people!! No way to estimate spending of Chinese; $280-$480 billion dollars </li></ul>
  13. 13. Competitive Advantages of GCSB contd. <ul><li>The industry leading online bill payment helps attract new costumers (10 million so far) </li></ul>
  14. 14. Competitive Advantages of GCSB contd. <ul><li>Earlier this year, MasterCard came public and BofA was entitled to shares in the IPO; I-banks left $40/share on the table </li></ul><ul><li>Visa, coming public soon; BofA as largest issuer will receive most shares </li></ul><ul><li>Price of IPO not yet know, BofA profit not yet known; not priced into stock </li></ul>
  15. 15. Competitive Advantages GCIB <ul><li>The I-banking and Sales and Trading have room to grow </li></ul><ul><ul><li>Investments in Fixed Income Underwriting & Trading have been proven to work: results are up 36% and 6% respectively with daily risk down 40% </li></ul></ul>
  16. 16. Competitive Advantages of GWIM <ul><li>When rates go up, banks deposits migrate to high yield funds elsewhere; BofA deposits migrate into BofA Money Market Mutual Funds, if rates go higher, this will continue </li></ul>
  17. 17. New Capital Allocation Strategy <ul><li>As of the end of Q2, BofA held $236 billion dollars in marketable securities </li></ul><ul><li>Announced that $100 billion would be sold; if rally in bonds continues, sales will make money </li></ul><ul><li>Free up more capital to deploy for loans and credit cards (higher yielding then securities) </li></ul>
  18. 18. Balance Sheet Hedging <ul><li>As a result of the rally in bonds, BofA has been able to sell securities and buy purchase options cheaply to hedge its rate exposure </li></ul><ul><li>From here, rates situation can only help, further inversion won’t hurt profits </li></ul><ul><li>Wachovia, another one of </li></ul><ul><li>our holdings, is still losing </li></ul><ul><li>money to change in rates </li></ul>
  19. 19. “ Disruptive” Strategies <ul><li>As one of the largest banks in the world, BofA can initiate a battle on its terms and takeover an industry in which it is weak </li></ul><ul><li>This is evidenced by the recent offer of free online trading; online brokers dropped 15% on announcement </li></ul><ul><li>CFO indicates that such an option is may work with mortgages, one of few current weaknesses </li></ul><ul><li>With housing depressed, now is the time to improve on area of weakness in mortgages; can be done cheaply </li></ul>
  20. 20. Chance for Vertical Integration <ul><li>If BofA improves in the mortgage origination, it can make loans to costumers, package the mortgages for sale and trade them; earning a profit on each step </li></ul><ul><li>Reduce the fees bank pays others </li></ul>
  21. 21. Analyst Opinion <ul><li>The average 12 month price target for all analysts is $57.67, however this estimate fails to account for the $2.24 in dividends received each year. </li></ul><ul><li>If the estimates are met and dividends factored in, the return should be upwards of 10%/year. </li></ul>
  22. 22. The CEO Visits BC: 11/14/2004
  23. 23. 1 Year Performance
  24. 24. 5 Year Performance
  25. 25. Conclusion <ul><li>Bank of America should be bought for our portfolio </li></ul><ul><li>Strength in bad times; outperformance in good </li></ul><ul><li>New Expansion into Credit Card business </li></ul><ul><li>1Billion+ untapped market in China for CC </li></ul><ul><li>Vertical Integration in Mortgages </li></ul>