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Is Bank of America (BAC) Worth a Look Despite 11.6% YTD Fall?
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The banking industry is facing a number of issues like the high interest rates, slowdown in loan demand, rise in funding costs, prospects of economic downturn and weakening asset quality. The regional banking crisis in early March that led to the collapse of three large banks and deposit outflows continues to adversely impact industry players’ financials.
The KBW Nasdaq Bank Index is down 19.1% so far this year on investors’ pessimistic stance on the sector. On the other hand, the S&P 500 Index is trading in green.
Investors must look for stocks that are fundamentally well-placed and will continue to thrive once the current headwinds cool off. Today, we will be discussing one of the largest banks in the United States — Bank of America (BAC - Free Report) — which is down 11.6% so far this year.
The primary reason behind investor apathy toward BAC seems to be its highly asset-sensitive balance sheet. Last year, the company recorded a 22% increase in net interest income (NII) (FTE) as the Federal Reserve raised the interest rates to a 15-year high of 4.25-4.50% to curb inflation. This was also supported by robust loan growth.
The uptrend in NII (FTE) and loans continued in the first half of 2023. But now, the company expects the rise in funding costs and modest loan growth to weigh on NII. Management expects NII (FTE) to be relatively stable in the third quarter on a sequential basis and be roughly $14 billion in the last quarter of 2023. For the full year, the metric is projected to grow slightly more than 8%.
Other than this, the worsening operating environment is a major near-term headwind. This is leading Bank of America to keep aside substantial money for potential bad loans, given the global recession risk due to geopolitical and macroeconomic concerns and tighter financial conditions. In the first six months of 2023, provision for credit losses recorded a huge jump.
Despite these concerns, Bank of America remains fundamentally strong. Let’s check the factors that show that the stock is worth keeping on the radar despite the recent sell-off.
Attractive Valuation: At $29.29 per share, Bank of America is currently trading at a price/tangible book value of 1.27X, way below the broader market average of 10.1X. Thus, the company’s beaten-down stock price and attractive valuation might be a good entry point for investors.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Robust Fundamental Growth Drivers: Bank of America continues to align its banking center network according to customer needs. The bank is set to embark on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, it plans to expand its financial center network into nine new markets.
The company also remains committed to providing modern and state-of-the-art financial centers through its ongoing renovation and modernization project. Over the past three years, BAC has been renovating and updating its existing financial centers across the country. By this year's end, more than 2,500 centers will have been renovated, creating offices and meeting spaces for clients to engage with financial specialists and ensuring a consistent and modern experience across all centers. These initiatives, along with the success of Zelle and Erica, will enable the company to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards.
BAC remains focused on acquiring the industry's best deposit franchise and strengthening the loan portfolio. Despite a challenging operating environment, deposits and loan balances have remained solid over the past several years. As of Jun 30, 2023, net loans and leases grew 2% year over year to $1.04 trillion. While tightening of the monetary policy and expectations of an economic slowdown are the headwinds, modest loan demand will continue to support the company’s financials.
Impressive Capital Deployments: Following the clearance of the 2023 stress test, BAC has announced a hike in the quarterly dividend by 9% to 24 cents per share. Prior to this, the company had announced a 5% hike to its quarterly dividend in July 2022.
In October 2021, the company's share repurchase plan of $25 billion was renewed. As of Jun 30, 2023, the company had $14.1 billion remaining available under the program. Driven by a strong capital position and earnings strength, the company is expected to sustain improved capital deployments and enhance shareholder value.
Conclusion
Considering Bank of America’s growth prospects and robust fundamentals, investors must watch the stock for long-term gains. The company’s efforts to bolster revenues, strong balance sheet and liquidity positions and expansion into new markets will keep aiding its financials. So, once the near-term uncertainty ends, the stock is likely to regain investor confidence and rally.
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Is Bank of America (BAC) Worth a Look Despite 11.6% YTD Fall?
The banking industry is facing a number of issues like the high interest rates, slowdown in loan demand, rise in funding costs, prospects of economic downturn and weakening asset quality. The regional banking crisis in early March that led to the collapse of three large banks and deposit outflows continues to adversely impact industry players’ financials.
The KBW Nasdaq Bank Index is down 19.1% so far this year on investors’ pessimistic stance on the sector. On the other hand, the S&P 500 Index is trading in green.
Investors must look for stocks that are fundamentally well-placed and will continue to thrive once the current headwinds cool off. Today, we will be discussing one of the largest banks in the United States — Bank of America (BAC - Free Report) — which is down 11.6% so far this year.
This Zacks Rank #3 (Hold) stock has underperformed the other three Wall Street biggies, Wells Fargo (WFC - Free Report) , JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) too. In the year-to-date period, C has lost 5.8%, while WFC and JPM gained 2.2% and 12%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
The primary reason behind investor apathy toward BAC seems to be its highly asset-sensitive balance sheet. Last year, the company recorded a 22% increase in net interest income (NII) (FTE) as the Federal Reserve raised the interest rates to a 15-year high of 4.25-4.50% to curb inflation. This was also supported by robust loan growth.
The uptrend in NII (FTE) and loans continued in the first half of 2023. But now, the company expects the rise in funding costs and modest loan growth to weigh on NII. Management expects NII (FTE) to be relatively stable in the third quarter on a sequential basis and be roughly $14 billion in the last quarter of 2023. For the full year, the metric is projected to grow slightly more than 8%.
Other than this, the worsening operating environment is a major near-term headwind. This is leading Bank of America to keep aside substantial money for potential bad loans, given the global recession risk due to geopolitical and macroeconomic concerns and tighter financial conditions. In the first six months of 2023, provision for credit losses recorded a huge jump.
Despite these concerns, Bank of America remains fundamentally strong. Let’s check the factors that show that the stock is worth keeping on the radar despite the recent sell-off.
Attractive Valuation: At $29.29 per share, Bank of America is currently trading at a price/tangible book value of 1.27X, way below the broader market average of 10.1X. Thus, the company’s beaten-down stock price and attractive valuation might be a good entry point for investors.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Robust Fundamental Growth Drivers: Bank of America continues to align its banking center network according to customer needs. The bank is set to embark on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, it plans to expand its financial center network into nine new markets.
The company also remains committed to providing modern and state-of-the-art financial centers through its ongoing renovation and modernization project. Over the past three years, BAC has been renovating and updating its existing financial centers across the country. By this year's end, more than 2,500 centers will have been renovated, creating offices and meeting spaces for clients to engage with financial specialists and ensuring a consistent and modern experience across all centers. These initiatives, along with the success of Zelle and Erica, will enable the company to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards.
BAC remains focused on acquiring the industry's best deposit franchise and strengthening the loan portfolio. Despite a challenging operating environment, deposits and loan balances have remained solid over the past several years. As of Jun 30, 2023, net loans and leases grew 2% year over year to $1.04 trillion. While tightening of the monetary policy and expectations of an economic slowdown are the headwinds, modest loan demand will continue to support the company’s financials.
Impressive Capital Deployments: Following the clearance of the 2023 stress test, BAC has announced a hike in the quarterly dividend by 9% to 24 cents per share. Prior to this, the company had announced a 5% hike to its quarterly dividend in July 2022.
In October 2021, the company's share repurchase plan of $25 billion was renewed. As of Jun 30, 2023, the company had $14.1 billion remaining available under the program. Driven by a strong capital position and earnings strength, the company is expected to sustain improved capital deployments and enhance shareholder value.
Conclusion
Considering Bank of America’s growth prospects and robust fundamentals, investors must watch the stock for long-term gains. The company’s efforts to bolster revenues, strong balance sheet and liquidity positions and expansion into new markets will keep aiding its financials. So, once the near-term uncertainty ends, the stock is likely to regain investor confidence and rally.