Bank Of America – The Acid Test For Next 5 Years Prospect

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Mar 11, 2015

Bank of America (BAC, Financial) is an American multinational banking and financial services corporation. It is the second-largest bank holding company in the United States by assets. BoA is one of the largest wealth management corporation and one of the leading players in investment banking market.

Currently Bank of America is anticipated to fail the 2015 stress test. After passing the round of test with more than required capital ratios, the bank appears to be in good health to have its capital returns plan pre agreed upon for March 11, 2015. The bank’s shares have been severely damaged in last few quarters by bombardment of legal issues. Even in the case of reverse motion, it looks like it is coming to an end and BoA’s stock presents an excellent buying opportunity.

The bank showed a 7.1% CET1 ratio under an adverse scenario where the minimum requirement to meet the passing was 5%. It passed the first round of test with bright results. The second round result is due for March 11, 2015. The bank is focusing on the approval of capital return plans. This shows the high possibility of passing the second test. The current chart looks like:

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Bank of America held its stocks back due to ongoing litigations. The bank has paid out billions for settlement of legal issues.

The yield curve

The yield curve describes the variants of short-term and long-term interest rates. Short-term rates are usually lower than long-term rates but at times the rate flatten and stay the same for both. The yield curve has been flat mostly due to Fed’s zero interest policy this year. It was expected that the rates would rise at some point this year; the yield curve has begun to steepen during the past week. This happens in the case of increased gap between the yields on short-term and long-term rates. This makes the curve appears to be steeper. Banks borrows short-term and lends long-term to grow bank’s profit margin. The 10-2 year treasury yield spread is currently at 1.46%, and still continues to rise

The estimate was for the gain of 240,000 which was a significantly evolved change. BoA is well positioned to benefit from rising rates of the market. They have done a tremendous job in cost cutting and eliminating errors from the balance sheet. Considering the fact that the sizes of balance sheet of the bank even a small tweaking could make a huge difference. This fact decreases the downside risk of an investment in Bank of America. The positive side of this is that the stock looks vastly undervalued relatively as compared to industry average.

Any turmoil in global market where Bank of America has its presence could be negatively affected. No stock will be immune. The concern is magnified due to the fact the market is still near to excel. The mortgage market will be able to withstand by disbursing loans on higher interest rates in the prime and subprime market.

Major breakthrough

Bank of America is undergoing a major cost reduction process over the last five years. The banks liquidated assets and its capital ratios have been rated over the coals by the Feds which was a burdensome process. The stock is on the verge of a major breakout in 2015.

Bank of America is giving a back seat to its mortgage woes and improving its fundamentals. This will definitely give boost to the stock. The positioning of bank is favourable enough to reap benefit from rising interest rates. Taking all these factors in consideration, it is clear that the reward is far glitterier and outweighs the risk.