Bank Of America: Trapped Capital Is The Real Problem With The Stock May 2, 2016 2:38 PM ET| About: Bank of America Corporation (BAC), Includes: C IP Banking Research IP Banking Research⊕Follow(1,928 followers) Deep value, banks, tech, large-cap Send Message Summary

Bank Of America: Trapped Capital Is The Real Problem With The Stock
May 2, 2016 2:38 PM ET| About: Bank of America Corporation (BAC), Includes: C
IP Banking Research IP Banking Research⊕Follow(1,928 followers)
Deep value, banks, tech, large-cap
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Summary

Most investors believe low interest rates are the main culprit for BAC’s lackluster performance.

Rates are important, but only part of the problem.

The fact is that underlying businesses are performing very well even in this environment.

The real problem is capital trapped in non-core divisions, and this problem is not going away any time soon.

Investors should temper their expectations accordingly.

Many retail investors believe that Bank Of America (NYSE:BAC) is underperforming and trading below tangible book value (TBV) primarily due to the low interest-rates environment (and lack of material dividends). The common wisdom of the investor on the street is that BAC will double when interest rates normalize.

I am sure many readers of this article expect this to be the case as well.

The point of this article is to highlight a slightly more complex narrative and perhaps a more realistic one. At the outset, I should say, I am bullish on BAC and I believe that at current prices it is undervalued. Having said that, I am shooting for $20 share price as opposed to $30 and change.

Everyone is entitled to his own opinion, but not his own facts. —Former U.S. Senator Daniel Patrick Moynihan

So what are the facts?

BAC’s core businesses are performing well even in a very low interest-rates environment – consider the following bird’s eye view of BAC capital allocation and RoTCE:

As can be seen from above, the returns on its core business (excluding Global Markets, which was impacted by an adverse trading environment) – earn well above their cost of capital). For example, 23% RoTCE in the consumer business is phenomenal returns that many banks would literally “kill” for.

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