Bank of America vs. Commonwealth Bank

Bank of America vs. Commonwealth Bank

In the US, Bank of America (BAC) and its friends have struggled. Only recently has it emerged that the retail side of their operations is performing better amidst struggling trading revenue, but stock prices are still down over 50% from their 52 week high. These banks are high growth stocks, if you pick them up in 2008 at the right price, and therefore Bank of America is paying a measly 0.01 cent dividend. No guarantees, just a rollercoaster ride into rags or riches.

Ever heard of the leopard that tried to change his spots? Well it seems that Bank of America’s Australian counterparts are inadvertently doing just that. Take Commonwealth Bank (CBA.AX) as an example. Usually regarded as a solid growth stock, with a nice dividend to boot, Commonwealth Bank is a core component of most fund manager’s portfolios. Great margins, great consumer demand, great funding costs, great everything really. The share price has fallen just 10% from its 52 week high (in comparison to the ASX200’s 20% fall), is down 20% from its post GFC high (don’t even look at Bank of America’s or Citigroup’s charts) and now boasts a dividend yield around 6.6%. Is this all too good to be true? Sadly it probably is. Think of Bank of America as being the daredevil BMX rider a school who still does a sneaky bit of homework on the side, to make sure that they still get through school with good grades. Commonwealth bank has never quite been that person, but has gone from your average Joe to now only riding their bike to the library Joe. Nothing wrong with that, they’re just not the same Joe any more, and they shouldn’t be thought of as their past self.

The Boring Bank of America

At Commonwealth Bank, net interest margins have been flat for years, the bank is well capitalised, has excellent liquidity and commands 29% of Australia’s saturated housing loan market. Fitch’s review of the company essentially said that it was good, but boring. Both Fitch and Moody’s highlight the Australian banking sector’s slight reliance on global wholesale markets, increasing their stability, but also taking away some of the pizzazz that makes Bank of America look like such a fun stock to own in 2008 at the right price.

Further dividend growth is seen, as the now defensive Commonwealth Bank (beta is approaching 0.75) has a business model that is starting to resemble a telecommunications company. The other three Australian banks are no different, although at least ANZ are trying to expand into an undeveloped goldmine in Asia and NAB are laboriously profiting from their UK acquisitions. If you are looking for some good, old fashioned, cigar smoking, heart attack inducing banks though, you must now look across the Pacific to the US. Bank of America, Citigroup etc; they’re your bankers’ banks, in the truest sense of the word. Bank of America even has a fatter net interest margin (2.59%) compared with Commonwealth Bank (2.25%), for those of you who still like your risk free steak well done.

So am I recommending Bank of America? No. Am I recommending selling Commonwealth Bank? Also no. What I am saying though, is that if you were looking to buy Commonwealth Bank for some leverage to the economy in a rally, or as a standard growth stock, it doesn’t look like that’s going to be happening anytime soon. Bank of America is still at the complete other end of the spectrum, but Commonwealth Bank is well and truly in the high yielding, kids’ university fund category now.

 In the pipeline: Can you hedge your mortgage?

Bullish on: Gold mining stocks relative to gold price (miners not pricing in high gold price), XJO (ASX 200 undervalued relative to global peers considering the resilient economy)

Bearish on: US Treasury Notes (yields too depressed given S&P’s performance and US economy), USDJPY (European woes will continue to strengthen the Yen)

As always, please leave any questions, comments or suggestions that you may have.