I argued back in January that Bank of America Corp (NYSE:BAC) stock had plenty of room to run, and since then not a whole lot has changed. BAC stock does trade about 10% higher, but the company is also coming off a strong fourth-quarter earnings report that helped BofA shares move higher.
Meanwhile, the long-term tailwinds behind BAC continue to strengthen, and near-term catalysts loom as well.
A March rate hike looks like a certainty at this point. Higher rates will help BAC’s net interest income, with BofA targeting a $0.05 increase for each 25 bps move. The worst of regulatory pressure almost certainly is behind the company, leaving more ‘normalized’ risks facing BAC stock.
Obviously, standard macroeconomic risks are a concern, but with broad markets at an all-time high, the market as a whole seems rather optimistic on that front.
Meanwhile, analyst expectations are increasing, fund ownership is growing, and BAC stock remains cheap. Indeed, BofA trades at just 12x 2018 analyst estimates, a multiple that still seems to incorporate some sort of near-term pressure. Add it up, and the run in Bank of America stock, which has doubled since late June, seems likely to continue.
The Numbers Still Work for BAC Stock
Even after a 100%+ run, it’s not as if BAC stock is expensive. The shares trade right at 1.5x tangible book value at the moment. That is the highest multiple for BofA in some six years, but it’s also a multiple well below what BAC stock received before the financial crisis.
Certainly, the banking environment has changed dramatically over the last decade, and not always for the better. But a more normalized environment for BofA would seem to support a more normalized multiple for BAC stock. And on that metric, BAC still trades at a discount to its peers.
Wells Fargo & Co (NYSE:WFC) trades at 2.2x tangible book value. JPMorgan Chase & Co. (NYSE:JPM) has a P/TBV of 1.9x. Even nearing JPM’s multiple would imply another 20% increase in BofA shares.
Meanwhile, on an earnings basis, BAC looks similarly cheap. The stock trades at just 12x 2017 earnings-per-share, a low multiple and a one-turn discount to both JPM and WFC. Essentially, the market seems to be pricing in either a near-term peak for BofA earnings, or the possibility of a decline by the end of the decade. Both seem too negative.
What Takes Down BAC Stock?
For all the regulatory pain that BofA, consumer banking peers and investment banks like Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS) have felt over the past few years, there has been one major benefit. U.S. banking has been “de-risked” to a large extent.
That hasn’t been a good thing for bank profits, to be sure. Last week, BofA CEO Brian Moynihan appeared to call for changes to the “Volcker Rule”, which limits proprietary trading. Other aspects of Dodd-Frank have handcuffed lending activity, at least according to some observers. And BofA’s Merrill Lynch unit has had to make changes in its practices in response to the now-paused “fiduciary rule” issued by the Department of Labor last year.
Lower profits do appear to have been joined by lower risk, however. BofA cited “a historic low” in its net charge-off ratio in Q4. Credit loss provisions came down, due in part to lower exposure to battered energy companies.
The key concern with bank stocks always is what risks are lurking within the balance sheet. Right now, however, the credit environment seems reasonably strong. And barring a major macro shock, which will likely take equity markets as a whole down and not just BAC stock, U.S. banking seems as safe as it has been in years. As long as that’s the case, and as long as BofA’s risk profile looks balanced, BAC stock can gain.
Don’t Fight the BofA Tape
Of course, there’s a simple strategy to take relative to BAC stock: Don’t fight the tape. Clearly, investor funds still are going toward the banking sector as a whole, including BofA. Goldman Sachs recently pointed out that Bank of America and other bank stocks remain popular with both hedge funds and mutual funds. Bank ETF inflows are up sharply as well.
There’s a contrarian argument that such optimism bodes poorly for BAC. At some point, the logic goes, the stock will run out of buyers. But we’re hardly at the point yet.
And Bank of America’s run isn’t just technically driven. Interest rate hikes will help 2017 and 2018 earnings. Lighter regulation, including potential changes to Dodd-Frank, can help as well. To be sure, BAC stock has had an impressive run. But it’s too early to call for an end to that run just yet.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
