Investment Analysis

Bank of America is among the leading financial institutions in the world and its customers include individual bankers, small and medium-sized firms and large organizations. Its products and services ranges from investing, banking, management of assets, risks management and other financial services. The company services about 47 million customers and small enterprises and has about 4,700 centers of financial services, about 16,000 ATMs and an excellent online banking that has previously been awarded. Its active accounts are approximately 33 million and over 20 million mobile users that are active. It has a leading global role of in management of wealth, investment and corporate banking and trading that comprises a wide range of classes of assets. The roles also include serving the various government institutions worldwide. The company has its operations in 50 states in the United States and over 35 countries in across the globe (Bank of America Corporation, 2015).

The last few years have been very challenging for financial institutions. Bank of America have embarked on addressing these issues through the trimming of large amount of funds in assets from their balance sheet , elimination of various non-core businesses and raising the capital and liquidity level in order to survive and ensure uninterrupted operations in any crisis that they may encounter. This also include right-sizing of the cost base for its revenue and good risk management and settling most of the issues concerning past financial crisis more so the mortgage space.  The company has also embarked on the need for high cyber security that is state-of-art and continued investment innovation and security technologies for its teammates and customers. If the company sticks to its core strategies of providing quality services to clients and customers as a driver for helping the growth of economy, it will manage to fulfill the set financial goals  through connection and simplifying a world that is quite complex.  To do this the company has focused on low-risk growth and high quality, restoring their brand and shared success with clients and customers (Bank of America Corporation, 2015).  The company serves business clients through business banking, Global Corporate, Commercial Banking and Investment Banking. The firm’s global capability is enabling it to serve various small and medium sized companies many of which are looking to access resources outside the United States while others are putting up manufacturing facilities around the countries that serve as their markets. They aim at reducing the delivery cost of their products and this is where the Bank of Africa comes in to help. The firm’s capability gives a competitive edge in the global market.  The company has also been continuously investing and helping clients by providing the best possible capital management and easing the means of transacting with their clients.  The Bank’s CashPro online application has enabled it to create efficiency and lower its cost through retirement of outdated payment technology.  The services to clients are also enhanced by working its commercial bankers through the bank’s U.S trust partners and Merrill Lynch. This has seen the corporate clients bring in more of their private assets to the bank’s Investment Management and Global Wealth businesses.  The banks also have a research platform consisting of 700 analysts, with Merrill Lynch being ranked among the top research firms globally by Institutional Investor Magazine (Bank of America Corporation, 2015).

To focus more on providing liquidity and capital to markets and companies across the globe, the bank acts as the intermediary between its issuer clients – firms issuing equity or debt – and its investor clients such as retirement and pension funds. The bank also experience synergy with its wealth management customers through research it provides to enable them make sound investment decisions. This is guided by a simple goal of not needing to be the largest player the business but being the best for their clients. The company’s teams continue to lower risks, simplify business and thus realize high revenue and profits Bank of America Corporation, 2015).

Financial ratios analysis

Financial ratios are vital aspects that help in understanding the performance of a company over a period of time (Khan & Jain, 2004). The company’s main financial ratios include the asset turnover ratio, profitability ratios, solvency ratio, debt equity and current ratio. The banks efficiency ratio for the years 2013, 2014 and 2015 period were 68.56. The bank’s asset efficiency ratio for the years 2013, 2014 and 2015 period were 77.07 %, 88.25 % and 68.56 % respectively. The profitability ratio looks into the percentage return on equity for the three years and included 4.61 %, 1.72 % and 6.29 percent.  The return on equity measures the bank’s earnings percentage contribution to the total equity for the shareholders. The efficiency ratio represents the company’s assets turnover in percentage. The banks debt-equity ratio for the past three years included 9.58 %, 9.39 % and 9.17% respectively. The debt-equity ratio defines the company’s financial leverage, a measurement of how much capital comes in form of loans or its ability to meet the financial obligations (Colombo & Stanca, 2006). The banks debt equity ratios for the three years include 1.14 %, 1.08 % and 1.01 percent respectively. In addition, the company’s free cash flow ratio includes 8.07 %, 5.29 % and 1.75 %. The percentage earning per share for the three past financial years include -12.86 %, - 20.76 percent and -10.65 % respectively. The earnings per share were calculated on the basis of 10 – year average. The company’s earnings indicate high volatility which can be attributed to the slightly higher level of financial leverage.  Interest is normally an expense that is fixed, hence the reason why leverage will always magnify the returns and the earnings per share. The operating cash flow ratio is an indication the extent to which current liabilities can be covered by the same cash flow realized from the operations (Wójcik, 2011).

The bank of America market index over the past five years indicates that it has recovered from previous financial crises. It has realized constant profits which have lead to a stronger capital base, which has afforded it opportunities for delivering high value to shareholders and to maintain growth in the long-term. This can be attributed to an end to the cycle of the banks downward trend. The bank shares in the past 5 years has shed some 7.4 percent to the current year an aspect that create a good entry point for any investors. Over the past one year, the bank’s net income interest has fallen by 12 %. Since 2012, the firm’s net charge-offs have experienced a significant decline, while its common equity that is tangible has grown a high record (Morningstar, 2016).  In the year 2015, the bank experienced an increase in the shareholder’s equity. This was driven by issuance of preferred stocks and higher earnings, and was partly offset by return of some capital to a number of shareholders through dividends for preferred and common stock and repurchases of shares (Marketwatch, 2016).

The performance of Bank of America in the stock market indicates its volatility hence an aggressive investor would be best suited for this investment. Such an investment includes a strategy for portfolio management whose attempt is to maximize on returns through taking a greater degree of risk (Finance, B. I. 2005). An approach for aggressive investment puts more emphasis on capital appreciation as the basic objective rather than principal safety or related income. An investment in the banking industry requires a bold risk taker given that the market is very volatile and the line between profit and loss is very thin. This is seen in the company’s earnings per share over the last 3 years, which has been continuously negative although there have been a positive growth in the year 2015. The risks in such an investment can be attributed to the low confidence in financial sector arising from fears of possible recessions and a low outlook for low interest rates. The uncertainty in the macro-economy has also contributed small rise for such interest rates weighing heavily on stocks in the banking sector. Thus, an aggressive investor would be best suited for this investment. The rationale for this investment include better target price in the foreseeable future which would lead to an upside potential stretching over a year (Pring, 1992).

References

Finance, B. I. (2005). The Boston Institute of Finance Stockbroker Course: Series 7 and 63 Test Prep + CD. Hoboken: John Wiley & Sons.240

Pring, M. J. (1992). The all-season investor: Successful strategies for every stage in the business cycle. New York: Wiley.79

Khan, M. Y., & Jain, P. K. (2004). Financial management ; Text, problems and cases. New Delhi: Tata McGraw-Hill. 7-9

Colombo, E., & Stanca, L. (2006). Financial Market Imperfections and Corporate Decisions: Lessons from the Transition Process in Hungary. Heidelberg: Physica-Verlag Heidelberg.70-71

Wójcik, D. (2011). The global stock market: Issuers, investors, and intermediaries in an uneven world. Oxford: Oxford University Press.16-17

Bank of America Corporation,(2015). Annual report.

Morningstar,(2016).Bank of America Corporation. Retrieved from: http://financials.morningstar.com/ratios/r.html?t=BAC&region=usa&culture=en-US