Analysis of Bank of America in 2021
If you’ve read my last article on banks in which I write about analyzing banks in America, you’ll know how banks make up as much as $4 trillion in market capitalization in America according to Fidelity. They make up one very important sector, and it’s no wonder that some of the biggest investors like Warren Buffet and Charlie Munger have their biggest stakes in them. In this article, we will make an analysis of Bank of America in 2021.
It is important to remember when analyzing bank stocks, the analysis is a bit different from measuring companies and other institutions. The product from the bank is cash, therefore we can’t tell if the money in the bank is deposited from the customer or it is generated by the bank as profit.
In short, our analysis will consist of the following:
- Analysis of the income statement;
- Calculation of tangible book value;
- Analysis of assets, liabilites, net interest, efficiency ratio.
Bank of America Income Statement
First, we will start by going through the income statement as of December 31, 2021. In the table below I outlined the main items we will need for analysis.
| in millions in $ | 2020 | 2019 | 2018 |
| Interest income | 71,236 | 66,769 | 66,789 |
| Interest expense | 8,225 | 22,345 | 18,607 |
| Net interest income | 43,360 | 48,891 | 48,162 |
| Total noninterest income | 42,168 | 42,353 | 42,858 |
| Total revenue, net of interest expense | 85,528 | 91,244 | 91,020 |
| Provision for credit losses | 11,320 | 3,590 | 3,282 |
| Total revenue, net of interest expense, net of provision | 74,208 | 87,654 | 87,738 |
| Total noninterest expense | 55,213 | 54,900 | 53,154 |
This is the most usual income statement from banks in which they put interest income in the first place. With this line, we can see how much interest the bank gets from their usually main operations – and that is providing loans to individuals, businesses, other financial institutions, etc. The other line is interest expense. In that line, we can see how much interest do banks pay to obtain cash used to make those loans.
They also disclose noninterest income which is not related to loan operations. This line most often includes investment banking fees, transactions fees, wealth management services and so on.
Total Revenue of Bank of America
When you add those two numbers, then you get total revenue, net of interest expense. As you can see in the table, Bank of America had 85,528 million of that revenue in 2020. The revenue dropped since last year because of covid-19 and struggles this sector encountered during that period.
What is also important to add is that I like to deduct provisions for credit losses. I deduct revenue from all provisions for credit losses. These are amounts that the company imposes on loans that it believes it will not get. In 2020 there was a huge increase in this amount – it went to $11,320 million from $3,590 million in the previous year.
When I deduct that amount from total revenue I get that Bank of America had $74,208 million in 2020. Deducted amount in 2020 may not be the most suitable for analysis, considering that this is one affected year, because of the covid crisis.
The total non-interest expense represents the amount of all other expenses that the bank has except interest.
Net Income to Common Shareholders
Furthermore, to get the real net income that we, as common shareholders would get, we must deduct income tax expense and preferred stock dividends.
| Income before tax | 18,995 | 32,754 | 34,584 |
| Income tax | 1,101 | 5,324 | 6,437 |
| Preferred stock dividends | 1,421 | 1,432 | 1,451 |
| Net income to common shareholders | 16,473 | 25,998 | 26,696 |
As I mentioned, net income in 2020 is much lower than in previous years. Mostly because of the huge provision made.
Analysis of Bank of America in 2021 Balance Sheet
Let’s see what is happening with Bank of America assets and calculate tangible book value.
| Year | Total Assets | Less: Goodwill & Intangibles | Less: Total Liabilities | Less: Preferred Stock | Tangible Book Value | Book Value Growth | Shares outstanding | Tangible Book Value / Shares | Market Cap | Price / Tangible Book Value |
| 2017 | 2,281,234,000 | 68,951,000 | 2,014,088,000 | 22,323,000 | 175,872,000 | N/A | 10,287,302 | 17.10 | 318,178,000 | 1.8 |
| 2018 | 2,354,507,000 | 68,951,000 | 2,089,182,000 | 22,326,000 | 174,048,000 | -1.04% | 9,669,286 | 18.00 | 252,237,000 | 1.4 |
| 2019 | 2,434,079,000 | 68,951,000 | 2,169,269,000 | 23,401,000 | 172,458,000 | -0.91% | 8,836,149 | 19.52 | 332,579,000 | 1.9 |
| 2020 | 2,819,627,000 | 68,951,000 | 2,546,703,000 | 24,510,000 | 179,463,000 | 4.06% | 8,650,814 | 20.75 | 266,634,000 | 1.5 |
In the last 4 years, total assets grew by ~$538 billion or ~5,4% CAGR/average growth. Moreover, Goodwill and intangibles stayed the same. Liabilities grew even at a higher CAGR than assets ~ about 6%. Tangible book value which we get by reducing the value of any intangible assets bank’s total book value. has grown by 4% in 2020 despite the crisis.
It is interesting to look at price / tangible book value. This ratio measures a company’s market value relative to its tangible assets. As you can see in the table, the ratio as of December 31, 2020, was 1.5 which is reasonable for a bank.
Bank of America’s Assets
Looking at the bank’s assets, it is easy to conclude what type of bank it is. All we need to look at is what percentage of banks’ assets are loans and securities and investments. In the table below you can see the percentage of those asset classes in total assets.
| in millions | Amount | % |
| Total Assets | 2,819,627,000 | 100.00% |
| Net Loan | 901,366,000 | 31.97% |
| SECURITIES_AND_INVESTMENTS | 792,194,000 | 28.10% |
| Cash, Cash Equivalents & Federal | 691,067,000 | 24.51% |
The bank has Net loans of only 32% of total assets and 28% of securities. There, we can conclude how Bank of America is an investment bank. Commercial banks have net loans of more than 40 or even 50% easily. However, most banks are a combination of two but have some sort of competitive advantage in one category.
Next what is interesting to see is how much deposits make total liabilities. With this indicator, we can conclude whether the bank has access to a low-interest source of income, or it must take debts with higher interest.
| Total Liabilities Net Minority Interest | 2,546,703,000 |
| Total Deposits | 1,795,480,000 |
| Total deposits / liabilites | 70.50% |
The ratio of 70% is not great, but also bad. As Bank of America is not mainly a commercial bank, I would say that this is a decent amount of deposits that one investment bank can get.
Interest-Bearing Deposits and Noninterest-Bearing Deposits
Looking deeper into the bank’s liabilities we can find that total deposits consist of interest-bearing deposits and noninterest-bearing deposits.
| in millions | Amount | % |
| Total Deposits | 1,795,480,000 | 100.00% |
| Interest Bearing Deposits Liabilities | 1,127,108,000 | 62.77% |
| Non-Interest Bearing Deposits | 668,372,000 | 37.23% |
While interest-bearing deposits are those on which banks have to pay interest, non-interest is more favorable to see investors find in liabilities. Mostly these are checking accounts on which bank doesn’t pay any interest or very low interest. As a result, the bank that has a bigger amount of these deposits has surely a healthier balance sheet structure. Analysis of Bank of America in 2021 shows that this is one of these banks. With ~37% it is one of the best in its industry.
Net Interest Margin
To get net interest margin we need to 1) add all the interest the bank gets from given loans, 2) reduce all interest that the bank has to pay on interest-bearing and noninterest-bearing deposits to 3) divide that amount by net loan amount. This measure shows of profitability that bank has on loans.
| Net Interest Income | 43,360,000 |
| Net Loan | 901,366,000 |
| Net interest margin | 4.81% |
The net interest margin of Bank of America is 4,81%. For investment banks, this is not the best number I have seen in the industry. However, it is a good average.
Efficiency Ratio
The last thing I like to analyze when I look to buy bank stock is its efficiency. To calculate efficiency we need to divide noninterest expense with total revenue. This measurement shows how much noninterest expense a bank needs to produce one unit of revenue.
| Non Interest Expense | 60,365,000 |
| Total Revenue | 86,266,000 |
| Efficiency ratio | 70% |
The efficiency ratio of Bank of America is 70%. That means the bank needs 0.7 units of noninterest expense to produce 1 unit of revenue. Again, not the best number I have seen in this industry. But not that bad also.
To Sum Up
Bank of America is one of the best banks in the world. The fact that some of the most famous value investors have it in their portfolios shows how attractive the bank is.
In analysis of Bank of America in 2021, we can notice that the bank had problems with the collection of some loans, so it decided to write them off. As a result, it distorted the picture of revenue and net profit in 2020. But no wonder given what the year was like.
Furthermore, in some of the ratios we used, it can be seen that 2020 does not have the best results for this bank. For example, Bank of America has a high-efficiency ratio which is not so good for the industry, a net interest margin which is a kind of industry average.
On the other hand, it has a more than satisfactory asset structure with a high percentage of noninterest deposits.
The price / Tangible book ratio also shows a pretty good ratio. We have to take into account that this bank has one of the biggest goodwills, which, although we took it away, means a lot in the bank’s business.
