Financial Analysis Of Bank Of America Research Papers Examples

Introduction

Bank of America is a financial company established in 1874 and headquartered in Charlotte, North Carolina. It provides banking and nonbanking financial services in the United States and outside. BAC’s business is divided into three segments as follows: Global consumer / Small business banking, Global corporate and investment banking and the Global wealth and investment management. BAC is a public company and has many shareholders who need financial information to assess the performance of the bank (Elliott and Elliott, 2009, p. 3) which can be facilitated by ratio analysis. This paper analyses certain ratios of the Bank of America over the period of three years – 2011, 2012 and 2013, the latest period for which annual statements are available. In addition, the share price of the Bank is contrasted with the market index – S&P 500

Ratio analysis

The accounting ratios express the relationships between various elements of the financial reporting (Elliott and Elliott, 2009, p. 681). The ratios evaluate the financial performance and position of the Bank in different areas. The ratio analysis has followed the following scheme: ratio definition, theoretic background, calculation for three consecutive years (2013, 2012, 2011), analysis of the trend and discussion of the possible reasons behind trend.

Profitability

The company’s profitability can be measured using the following ratio: ROE=[Net Profit]/[Shareholders equity]
ROE measures how effectively management has used the capital given to them by the investors. It is of importance for shareholders as in the long term the valuation of the company is affected by ROE (Palepu et al, 2010, p. 208).
The foregoing table depicts change in ROE which has a clear upward trend. It means that the returns on shareholder capital have been improving over the observed period. A brief review of the latest financial statements reveals that the improvement in earnings can be mainly attributed to the considerable decrease in the provision for credit losses and reduction of operating (non-interest expenses, such as salaries etc). It can be explained by the more prudent practices and efficient operating policies adopted by the Bank following the great financial crisis of 2008-2009.

Capital Structure and Solvency

The capital structure and solvency are especially important for a bank. The banking industry is subject to capital adequacy regulations which are measured by different ratios. This paper analyses capital sufficiency of the Bank of America by using a Tier 1 capital ratio which is a Basel Committee concept (BAC, 2013 annual report).

The ratio is defined as [Tier 1 Capital]/[Risk Weighted Assets]

Tier 1 capital is derived from the Equity by deducting unqualifying components, such as preferred stock, goodwill etc. Risk weighted assets is arrived at by weighing all assets according to their risk factor. More risky assets have higher weight and less risky assets have lower weight (e.g. a loan could have weight 100%, while US Treasuries have risk 0%).

Investors ratios: Earnings per share, Price to earnings ratios and Dividends ratio

Basic EPS is calculated as follows:
EPS=[net income adjusted for preferred stock dividends]/[weighted-average number of common shares].
This is a ratio which is widely used by investors, however, on its own it does not give relevant information as companies with the same earnings and equity, may have different EPS because one company has fewer shares issued resulting in higher ratio (Stickney et al, 2009).
Price to earnings ratio which is simply share price divided by EPS is also of importance for investors. These ratios are demonstrated in the following table.
The table illustrates that EPS has increased substantially from USD 0,01 in 2011 up to USD 0,94 in 2013. This is clearly attributable to the improved performance which was explained in the profitability analysis. While EPS has grown, P/E ratio has fallen from 663 down to 17.

The following table depicts dividend yield of the Bank’s shares, calculated as the [Dividend per share]/[share price]

Annual statements for the period reviewed show annual dividend of $0.04 for each share evidencing stable dividend policy of the company. The dividend yield is quite low and going down from 0,72% to 0,24%, which is attributable to the improving share price. One explanation could be that firms with high investment opportunities may choose to pay small dividends, as they need capital for investment (Ross et al, 2010, p. 285).

Share price analysis

Annex 1 depicts and contrasts BAC share movement against S&P 500 market index. In order to make meaningful comparison, the S&P 500 index has been normalized to match BAC as at the beginning of 2010. It appears that while the market as represented by S&P 500 has grown by about 100% (from about 16 to over 30) over the five years period, the BAC share price has fallen and then recovered back to about 16. The graph demonstrates that during uncertain market movements as in 2010-2011 the investment has fallen sharply, while during good years of recovery, it recovered as strong as the market. It is in line with the beta of BAC which is 1.33 as per Yahoo finance. Actually, a beta exceeding 1 means that the investment could be considered more risky, as it has higher volatility than the market on average. Therefore, this investment is not for a risk adverse investor. On the other hand, the fundamental performance of the bank is strong as evidenced by improvement in its profitability ratio. On the fundamental level this investment appears to be linked to the economic conditions of the US and therefore the shares could be favored by those investors who bet on the strong economic recovery of the country.

References

BAC (2014). 2013 Annual report. Retrieved from:
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol- reportsannual#fbid=fKEcOSurY75
Elliott, B. and Elliott, J. (2009). Financial accounting and reporting. 13th ed. UK: Pearson Education Limited.
Malikova, O. & Brabek, Z. (2012). ‘The influence of a different accounting system on informative value of selected financial ratios’. Technological and Economic
Development of Economy, 2012(3).
Palepu, K., Healy, P. & Peek, E. (2010). Business Analysis and Valuation (IFRS Edition), 2nd
ed. United Kingdom: Cengage Learning EMEA.
Ross, S.A., Westerfield, R.W. & Jaffe, J. (2010). Corporate Finance. 9th ed. New York, NY:
McGraw-Hill Irwin
Yahoo Finance (2015). BAC key statistics. Retrieved from:
https://finance.yahoo.com/q/ks?s=BAC+Key+Statistics
Annex 1