Bank of America Vs Goldman Sachs Stock: Which Is Best?

Bank of America vs Goldman Sachs: Before you buy shares in the financial sector, you need to make sure that you understand the industry, the threats facing banking as a whole, and what it takes for a company to be successful in the sector.

Once you have a handle on those elements, and you still want to invest in a bank stock, you can start to evaluate which one is right for your portfolio.

Pros & Cons of Investing in Bank Stocks

Investing in bank stocks is not for everyone. Yes, they appear to make money, even in financial downturns thanks to all the fees and interest rates that people pay, but the industry is complicated.

The losses can be huge and the costs to run a bank can be very high, especially now with so many regulations.

Compliance is expensive and not every investment the bank makes is a good one. Some amount of loss is expected, even forecasted, but when those figures are off, the bank’s share price can take a serious hit.

Further, keep in mind that competition in the banking industry is fierce and it is not localized. Today’s consumers do not need to choose a local bank. They can pick from a range of financial institutions thanks to apps and online operations.

Plus, many of these online banking providers are able to offer benefits that more established banks cannot because of the overhead those financial institutions endure.

Add to that a topsy turvy world of negative interest rates, cryptocurrencies, and derivatives exposure and you’ve got a recipe for a complicated investment thesis.

Is Bank of America Stock A Buy?

Bank of America [NYSE: BAC] is one of the largest banks in the world. It employs roughly 204,000 people and serves individuals as well as businesses of all sizes, institutional investors, and even governments.

Bank of America conducts its operations through four segments:

1. Consumer Banking,
2. Global Banking,
3. Global Markets, and
4. Global Wealth & Investment Management (GWIM).

Banks and credit unions, investment firms and brokerages, lenders and hedge funds – Bank of America [NYSE: BAC] competes against a wide variety of companies. It also competes in different ways. The reputation of the bank matters as well as its interest rates, customer service, and product offerings.

To remain successful, Bank of America [NYSE: BAC] has to navigate several risk factors, starting with the broader challenges posed by the economy.

Changes in the financial health of a country or community influence the behavior of the bank’s customers as well as its expenses and the rates it can offer. These issues can influence the value of Bank of America’s assets, influence the cost of debt capital, or play a part in customer allocation of investments.

BofA tries too forecast these changes but there is always a margin of risk. In the worst case scenario, Bank of America’s liquidity could be impacted as its access to capital markets is constricted or the cost of borrowing goes up. The bank is also vulnerable to changes in its credit rating.

Bank of America [NYSE: BAC] is impacted by the housing market as well.

Fluctuations in real estate prices have trickle down effects. They change the value of the bank’s loan portfolios and impact credit quality. If the disruption is big enough, Bank of America could end up with credit loss reserves that are insufficient.

Further, there is the cost of doing business. Financial regulations in the United States are changing all the time. Bank of America must navigate those laws and organize its business to comply. The costs add up, and they erode profitability.

Going forward, Bank of America [NYSE: BAC] is focusing on consumers.

The bank is pushing for better technology and account management solutions for its customers as well as building financial centers. Its goal is to make sure that over 90% of people in the United States have easy access to a Bank of America branch. With that in mind, the bank is on track to develop 350 new locations by 2021.

The CEO, Brian Moynihan, is also keeping an eye on cost control. However, investors in Bank of America should know that this strategy is different than what many of Bank of America’s competitors are doing – for better or worse.

Should You Invest in Goldman Sachs Stock?

Goldman Sachs [NYSE: GS] is also a major player in the banking world. It has a presence in 30 countries around the world and it is fairly distributed. Roughly 46% of its operations are outside the Americas. However, would-be investors in this company should know that it is not a traditional bank.

Goldman Sachs has four business segments:

1. Institutional Client Services,
2. Investing & Lending,
3. Investment Banking, and
4. Investment Management.

Because its business has a different focus than Bank of America, Goldman Sachs experiences different capital requirements and risks.

The company is heavily entrenched in investing, but it also has a solid business in underwriting, both equity and debt. However, investing is not Goldman Sachs on business.

It has been trying to get into retail banking as well. Through an offering called “Marcus: By Goldman Sachs,” the bank is offering high-yield online savings accounts as well as no-fee, fixed rate personal loans and CDs.

These offerings are fairly new, but they have been well-received. Marcus received a JD Power award in 2019.

Marcus is part of Clarity Money which allows users to leverage AI technologies to manage their spending in one place. So far, over 3 million people have signed up.

Goldman Sachs [NYSE: GS] is expanding on its consumer-forward offerings. It recently partnered with the UK-based company Saga to launch additional savings account opportunities that allow consumers to leverage Saga’s membership program which provides users with special discounts.

The partnership is part of a Banking-as-a-Service (BaaS) initiative and Goldman’s push to reach tech-savvy baby boomer customers.

Bank of America vs Goldman Sachs Stock: The Bottom Line

The bottom line as to which stock is best for you is going to depend on your investment goals. You will probably need to hold on to a bank stock in order to realize a strong return – this is not a sector well-suited to short-term buying and selling.

Financial stocks are tough. Investors in these stocks tend to be fickle. They sell on worries of recession or rate changes, even if the reality is not nearly as dire.

As such, the stock prices of bank stocks may not reflect the long-term value of the financial institution. Before you buy in to either Bank of America, Goldman Sachs, or another bank stock, keep this in mind.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.