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Why it is Wise to Hold BofA (BAC) Stock Despite Lower Rates

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The longest-running bull market ended a few days ago after major indexes dropped by more than 20%. Fears regarding the coronavirus (also known as COVID-19) outbreak along with anxieties about an expected recession have been affecting the performance of stock markets of late. Overall equity markets have become highly volatile.

Like most other companies, shares of Bank of America (BAC - Free Report) have been affected by the pandemic. Shares of BofA have lost 41.9% so far this year. The fall is worse than the industry’s decline of 32.9% over the same period.

Notably, the bank’s shares tumbled 15.4% yesterday, hitting a 52-week low.

In addition to the coronavirus fears, several factors have been negatively impacting BofA. After unexpectedly cutting interest rates by 50 basis points early this month, the Federal Reserve lowered benchmark rates to almost 0% on Sunday for the first time since the 2008 financial crisis.

Being a bank, BofA is one of the biggest beneficiaries of rising interest rates. Hence, the Fed’s decision has turned out to be bad news. The company’s net interest income (NII) growth will likely get hampered, owing to lower rates, which, in turn, will result in a decline in its net interest yield. Notably, owing to the three rate cuts last year, BofA’s net interest yield declined to 2.43% in 2019 from 2.45% in 2018.

Moreover, following the “unprecedented challenge” from the coronavirus pandemic, BofA along with several other banks, including Citigroup (C - Free Report) , Goldman Sachs (GS - Free Report) , JPMorgan (JPM - Free Report) and Morgan Stanley (MS - Free Report) , have suspended their share buyback programs till second-quarter 2020. The move did not result from any liquidity crisis. Instead, banks intend to utilize the freed-up capital to lend to individuals and businesses, which have been adversely impacted by the outbreak.

Owing to these major concerns, BofA’s profitability will likely get hurt over the next couple of quarters.

Now, if you are thinking of getting rid of the stock based on the near-term matters, take a look at the factors mentioned below before making any decision. This is not 2008, when banks had collapsed, resulting in a financial crisis. Once the concerns get resolved, BofA is expected to show signs of recovery, driven by its fundamental strength.

Let’s take a look at the company’s key fundamentals:

Its organic growth is impressive. Over the last four years (2016-2019), NII witnessed a CAGR of 5.6%, driven by steady loan growth and higher rates. Moreover, as the bank remains focused on acquiring the industry's best deposit franchise, deposit balances have witnessed a CAGR of 4.7% over the past three years (ended 2019). Thus, despite the Fed’s accommodative monetary policy stance, continued rise in loan balances is expected to keep supporting the company’s interest income to an extent in the near term.

Further, BofA continuously aligns its banking center network to meet changing customer needs. The bank is on track to open 500 centers in new cities and redesign 2,500 centers with technology upgrades by 2021. Also, it is opening fully automated branches, which will feature ATMs and a video conferencing facility, allowing customers to communicate with off-site bankers. The initiatives will likely enable BofA to further improve digital offerings and cross-sell several products.

Moreover, the bank has been able to manage its expenses well. Its expense-saving plan — Project New BAC (launched in 2011) — helped improve overall efficiency and save as much as $8 billion in operating expenses annually till the end of 2014. Further, despite undertaking several strategic growth initiatives, BofA managed to keep costs around $54 billion in the last four years. For 2020, the company expects expenses to be in the low $53 billion range.

Further, given a robust capital position, the company is expected to continue enhancing shareholder value through efficient capital deployment activities. In June 2019, BofA received the Fed's approval for its 2019 capital plan, which included a 20% quarterly dividend hike and a share repurchase authorization worth $30.9 billion.

Apart from the above-mentioned factors, BofA currently carries a Zacks Rank #3 (Hold). The company’s current-year earnings estimate of $2.95 per share has been stable over the past seven days. Also, the Zacks Consensus Estimate for its earnings suggests year-over-year growth of 7.3% for 2020 and 7.7% for 2021. Further, its long-term (three-five years) projected earnings growth rate of 9% promises rewards for investors.

The company also has an impressive earnings growth history. In the last three-five years, its earnings grew at a rate of 26.9%, higher than the industry average of 13.6%.

Moreover, if we compare BofA’s current price/earnings (P/E) (F1) and PEG ratios with the industry average, the stock seems to be trading at a discount. Also, it has a Value Score of B. The Value Score condenses all valuation metrics into one actionable score, which helps investors steer clear of “value traps” and identify stocks that are truly trading at a discount.

Therefore, based on the above-mentioned factors, you should hold on to BofA stock to get solid returns over time.

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