The one bank that has really struggled ever since the financial crisis has been Bank of America Corporation (NYSE:BAC). Things have dramatically turned around for BAC stock, particularly in the past year. BofA stock has also soared from around $17 to $22 since the election, as investors hope that Trump will ease up on banking regulations.
Mostly, though, there are a good set of tailwinds for BAC stock going forward. It’s a bit overextended here after the post-election run, but it sports an average valuation for its peers with a price-to-earnings of 14 on next year’s earnings.
BAC stock is going to report Q4 earnings next week, and investors want to keep an eye on several things. I think the primary element we should keep an eye out for is how Bank of America is lending its money.
What BAC Stock Has Going for It in 2017
The days of freewheeling lending are long gone, so investors should see growth in the loan portfolio, but nothing that seems too quick. The growth needs to be controlled, and I’d raise an eyebrow if I saw metrics drastically different from what we’ve seen in previous quarters and year-to-year. That includes things like not seeing loan-to-value increasing.
Most people would say that they want to see big growth in deposits. That’s important, because it means there is more money to lend out. However, I want to see deposits in conjunction with loan growth. I don’t want that loan-to-deposit ratio to leap insanely high.
The other question I have is that important bottom line number: net interest margin. This is the return that BofA earns on its loans after backing out related expenses. We want to see increasing net margins. When it comes to the Federal Reserve’s rate hikes, BAC is actually in favor of them, because it can leverage its liquidity to lend out money, which it gets at very low rates. Rate hikes mostly affect borrowers, so net interest margin will increase in these periods.
Another tailwind that has yet to kick in, but very well might in the near future, is the BAC stock dividend policy. It has been required to hold its $0.075 quarterly dividend in place by regulators, who have been particularly harsh regarding the bank’s stress tests. However, as BofA operations continue to improve, the opportunity to raise that dividend will occur. That will give a big boost as investors move back into BAC stock to capture any dividend increase.
This is partially tied to expenses, which is something Bank of America is still struggling with. As expenses get under control, deposits grow, NIM increases and net income grows, the payout ratio will decline. As it is, it’s only about 25%, which is less than some of its larger peers.
Bottom Line on BofA
I think BofA will report a good quarter. Some of the bad publicity from the Wells Fargo & Co (NYSE:WFC) debacle probably sent some customers scurrying to other competitors. So, I’d like to see about 3% top line growth as far as revenues and net interest income. I’d like to see several hundred thousand new credit cards issued. As far as efficiency ratio, I’d be thrilled to see it inch closer to the 50% area.
We want to see loans increase by around 1%. Keep it small. Keep it prudent. I want those non-performing loans, which chew through capital and kill bottom-line earnings, to continue their decline. They hit $10.3 billion in Q3 of 2015, but were down to $8.73 billion this past quarter.
I think a big move is baked in following the election, but a decline under $20 is a definite buy.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
