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Bear of the Day: Bank of America (BAC)

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Bank of America (BAC - Free Report) is a Zacks Rank #5 (Strong Sell) that is one of the largest and well-known banks in the country. The stock is down 40% from its 2020 highs, but investors shouldn’t think they are getting a bargain.

The financial crisis in 2008 was one of the worst times ever for the financial space. There were a lot of institutions that went belly up and even more that were bailed out. While todays situation isn’t as bad for the financials, there still is a lot of concern surrounding the space.

Stay-At-Home and Technology

Most of us don’t have to go to the bank to do business and that is a plus. However, as more people realize this due to the COVID lockdowns, they are finding other technologies that are making traditional banking go the way of the dodo bird.

Companies like PayPal are Square are being adapted by younger generations. While banks are still a necessity in the modern economy, we are less reliant then we were even ten years ago. In addition, cryptocurrency is slowly making its mark and becoming a competitor to the way money moves around the world.

Interest Rates and Estimate Revisions.

With interest rates at zero and perhaps one day going negative, banks will find it very hard to make money. This environment isn’t great for lending as their margins become very small. Analysts are cutting estimates for the banks on this notion.  

We are seeing earnings estimates being slashed across all-time frames. For the current year, estimates over the last month have fallen 17%, going from $1.77 to $1.48.

Exposure

Just like in 2008, a big worry about the banks is the type of risk that’s on the balance sheet. The high-risk loan categories in energy, hotel, restaurants and retail are a focus during the pandemic. According to a report by PiperSandler, 23% of Bank of America’s loan exposure involves these “at-risk” industries.

If the lockdowns continue much longer and these businesses can’t open, there will be bankruptcies. Banks like BAC would be on the hook, which would put significant pressure on shares.

In Summary

While this risk is known and in the share price, we just don’t know how bad it might get. Investors are advised to stay away from BAC and its peers until we have some clarity on the lockdowns and the virus itself.



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