Bank of America (BAC)

Some of the best ideas are stolen from others. After an appearance on the cover of Forbes and a small stake created by Berkshire Hathaway (BRK-B), Bank of America’s old-school strategy is starting to look very wise and tempting; not to mention the generous +5% yield.

The over-riding strategy for BAC can be summed up in a single word (barrowed from Forbes): ubiquity. By having more branches, more ATMS, and solid to great service, BAC hopes to be the default retail banking choice of average Americans. The numbers are impressive.

ATMs - 17,000 Closest competitor - 8,700
Retail Deposits - $472 bil. Closest competitor - $300
Credit Card Balances - $152 bil. Closest competitor - $148

With 5,700 branches and three quarters of the population in its service area, it’s no wonder that Buffett sees this company as a strong and conservative company. And, it doesn’t hurt to mention the 5% yield again does it?

As a matter of regulation, a US bank can not exceed 10% of America’s deposit base. That gives BAC several options as it nears that point; 1) expanding branches through out the US via organic growth (slower and expensive) 2) pursue growth in investment banking, brokerages, derivatives (cyclical, risky) 3) expand aggressively overseas using a similar strategy.

In an effort to keep investing simple, visualize what Bank of America is good at:
Interest Paid in savings account: 0.2%
Interest Earned on a car loan: 7.2%
The larger BAC grows its deposit base, the more profitable volume it can create for shareholders.

Recommendation
Buffett’s been buying so that should give you the go ahead to buy on the down days. We’re waiting for the sector to take a few more shots in the chin before we jump in (1-9 months). This means missing out on the yield but a money market account can offer similar/safer returns. It’s all about the looooong plate appearance, so be patient. If the financials get crushed, look for BAC in the ruble. We’ll let you know if we see it happen.

Other Buffett banks: USB, WFC, STI -All have strong yields and safe balance sheets for income investors.