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Why the Rally Should Continue for BofA (BAC) Stock

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If you have been closely following the major bank stocks’ performance, you must have noticed the recent surge in Bank of America Corporation’s (BAC - Free Report) shares. The shares gained 24.2% since the election results, compared with a gain of 2.8% for S&P 500 and 16.1% for the KBW Bank Index.

BofA is not the only bank stock that witnessed a rally. Prices of other mega bank stocks, including JPMorgan Chase & Co. (JPM - Free Report) , Citigroup Inc. (C - Free Report) and Wells Fargo & Company (WFC - Free Report) , have increased 14.5%, 13% and 16.2%, respectively, over the same time frame.

The rally is primarily attributable to the expectations of softer regulation, lower tax rates and increase in fiscal spending in the Trump era. Apart from these, Trump’s bias for higher interest rates boosted investors’ optimism.

These catalysts should work in favor for all the banking stocks, but BofA is better positioned to continue the rally. Here’s why:

Greater Interest Rate Sensitivity: Per the latest quarterly filing with Securities and Exchange Commission, a 100-basis-point (bps) rise in short rates will lead to a $5.3 billion rise in BofA’s net interest income (excluding trading-related net interest income). This is way above $2.8 billion for JPMorgan and $2.0 billion for Citigroup.     

As Wells Fargo does not provide a clear interest rate sensitivity picture, we are unable to say how much improvement it will record.

For BofA, on a relative basis, a large part of total funding costs consists of non-interest bearing deposits. As of Sep 30, 2016, non-interest bearing deposits comprised approximately 36% of BofA’s total deposits.

Now, if you look at the corresponding figures of other big banks, they are lower than BofA’s. As of Sep 30, 2016, non-interest bearing deposits at JPMorgan, Citigroup and Wells Fargo were 31.2%, 23.2% and 29.5%, respectively of total deposits.

Hence, among these big banks, BofA is likely to be the biggest beneficiary when the rates rise.

Favorable Zacks Rank & Earnings Estimate Revisions: BofA currently holds a Zacks Rank #2 (Buy). Further, over the past 60 days, the company has seen nine upward estimate revisions, with no downward revisions for 2016. The Zacks Consensus Estimate for 2016 has surged 16.7% to $1.47 per share, over the same time frame.

Valuation Looks Reasonable: Despite this substantial surge in shares, BofA stock seems underpriced on the basis of Price-to-Earnings (P/E) and Price-to-Book (P/B) ratios. BofA has a P/E ratio of 13.82 compared with the industry average of 15.13. Also, its P/B ratio of 0.84 is below the industry average of 1.35.

Further, BofA has a Value Style Score of ‘B.’ The Value Style Score condenses all valuation metrics into one actionable score that helps investors steer clear of ‘value traps’ and identify stocks that are truly trading at a discount. Our research shows that stocks with Style Scores of ‘A’ or ‘B,’ when combined with Zacks Rank #1 (Strong Buy) or #2, offer the best upside potential.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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