Dear Mr. Berko:
I want to own a bank stock. I am very conservative and don’t care for risk, so I’m thinking of buying 200 shares of Bank of America, which has been doing business for over 50 years, as a safe investment. What do you think?
– P.R., Erie, Pa.
Thanks to founder A.P. Giannini, the Bank of Italy was San Francisco-born in the fall of 1904. Giannini established the bank to serve the working class, especially Italian immigrants living in San Francisco. The bank survived the 1906 San Francisco earthquake, World War I, the Teapot Dome scandal, the Great Depression, World War II and the Cold War. It prospered with a branch banking strategy, opening nearly 500 branches all over California. In 1930, Giannini renamed his bank the Bank of America. And in 1945, with assets of $5 billion, Bank of America (BAC-$30.50) was the world’s largest bank.
Today BAC has nearly 4,500 branches in 29 states. Branches are important for retail banks to attract new accounts. Though many of us perform most of our routine tasks online, “studies show” (for unexplained reasons, those two words feel like chalk screeching on a blackboard) that 65 percent of Americans prefer visiting a bank’s branch when opening a new account. And about 50 percent of bank clients visit their branch about once a month. There’s a palpable comfort in talking to a real human being and seeing the bricks-and-mortar building where your money is deposited. Whereas many banks are closing marginal branches in existing markets, Bank of America announced recently that it plans to open 500 branches in the coming few years. Several years ago, BAC expanded its branch network to Colorado and Minnesota. This attracted a significant number of new accounts, and BAC’s profitable loan portfolio has increased by nearly $60 billion in the past four years, to $926 billion in 2017. This success has encouraged management to expand its goals and open branches in major metropolitan areas in Ohio, including Dayton, Cleveland, Toledo, Columbus and Wapakoneta.
Though BAC shares have reached a 10-year high, total asset growth in that time frame has been unremarkable. BAC’s loan portfolio growth is anemic, and net interest income and book value have also fallen. But on the plus side, loan loss provisions have fallen by 50 percent in the past 10 years. Noninterest income has nearly doubled. Return on total assets has tripled. Return on shareholder equity has improved threefold. Long-term debt has declined. And shareholders’ equity has improved by nearly $30 billion. All that said, even though BAC’s tax rate will decline from 37.6 percent to 20 percent this year, even though return on total assets should improve by 19 percent this year, even though 2018 earnings may improve by 50 percent and even though the dividend may grow from 39 cents to 52 cents this year, I’d not be a shareholder.
This humongous bank has over 10 billion shares outstanding, and that’s a lot of stock. In fact, if those shares were placed edge to edge, they’d equal five round trips to the moon with enough left over to circle the Earth and Oklahoma City. This bank is so big that if its $2.2 trillion in total assets generated $100 million in profits, it would translate to a penny a share. Do you have any idea how many loans BAC must make to earn $100 million? The answer is “more than you can count on the fingers of both hands.”
I don’t care to own BAC, but I do believe that the coming few years will be excellent years for the banking industry. Because I’m bullish on the banking industry, I suggest you consider the SPDR S&P Regional Banking ETF (KRE-$61). This is an exchange-traded fund with $4.9 billion invested in Synovus, IberiaBank, Zions Bank, Opus Bank, KeyBank, Umpqua, BB&T and 100 other banks from coast to coast. KRE trades at a 3.9 percent premium to net asset value, and the dividend yields 1.3 percent. This is a much more conservative investment than 200 shares of BAC, and Zacks rates KRE as a strong buy. KRE’s five-year annualized total return is 17.9 percent, and I think that over the next five years, KRE could perform nearly as well. And remember to reinvest the quarterly dividend.•
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or email him at firstname.lastname@example.org. The opinions expressed in this column are those of the author.
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