Bank of America Stock (BAC) Hammered After UK Referendum

Stock markets around the world are being hit hard on the last trading day of the week after a historic referendum that resulted in the UK deciding to leave the European Union. Credit Suisse Group AG (ADR), one of the largest financial institutions in the UK, experienced a 16% declined during the most recent trading session. The events of the voting and its outcome doesn’t necessarily mean large companies and the financial markets are going to become less profitable in the long run. But investors are unsure about what an independent Britain will look like for the British economy as well as for the European economy as a whole. This uncertainty is what’s creating the volatility in the markets today. The FTSE which is an index that tracks the largest companies listed on the London Stock Exchange just had the worst trading day since 2008. Meanwhile, the DAX, the German stock market index, had its worst day since 1989.

The effects of the referendum has reverberated all the way across the pond to the United States. Bank of America’s stock price (BAC) tumbled 7.41%, ending the day at $13 per share. Even though it wasn’t as big of a drop as some European banks, it was still enough to startle many people. In an internet memo Bank of America told its employees that the impact on the bank and its operations in the United Kingdom will come into clearer focus in the coming months. The bank reassured everyone saying it has a long track record of thriving on change, be it regulatory, market, or strategic.

But the UK Referendum wasn’t the only factor that hurt the bank recently. One of Bank of America’s subsidiaries is in trouble with regulators. Merrill Lynch & Co, which was acquired by Bank of America in 2008 at the height of the financial crisis, has to pay $415 million in a settlement with the Securities and Exchange Commission. An SEC investigation found the firm in violation of rules that are intended to protect their clients. Instead of depositing funds into a reserve account, they stored up to $58 billion a day in a clearing account, which freed up billions of dollars for private trading activities. However, William Halldin, a spokesperson for Merrill Lynch defended the company in a statement saying “while no customers were harmed and no losses were incurred, our responsibility is to protect customer assets, and we have dedicated significant resources to reviewing and enhancing our processes. The issues related to our procedures and controls have been corrected. We have cooperated fully with the SEC staff throughout this investigation.”

Due to this settlement and other events such as the result of Britain’s recent referendum, Bank of America shares are down about 23% so far this year. But nothing has really changed in terms of the fundamentals to the company’s finances to justify the stock moves that we’ve seen recently. BoA is still the same bank it was a year ago, and with a price to earnings ratio of 10.6 times it doesn’t seem too expensive at the moment. The banking industry in general is much better positioned to weather these ups and downs today than in 2008 because they have better leverage and capital ratios. Consumers are also showing signs they want to spend more according to David Herro, fund manager at Oakmark International. He says, “consumers are doing pretty good. They’re not as indebted as they were in 2008. They don’t have those debt overhangs.” There is considerable more short term uncertainty in the environment right now but this could be an opportunity to pick up some stocks while they are relatively cheap. The important thing is to look for the quality companies that can ride out the storm.

This author is long 150 shares BAC as of writing this post.