Bank of America Corp (NYSE:BAC) is proof that in the markets, a lot can happen in just a few short months. Between early October and late February, BAC stock logged an impressive 60% gain — this after about three years of essentially running in place.
Since then, however, BofA dropped by double digits, and has been stuck in neutral ever since.
Bank of America isn’t suffering in a bubble, of course. The rest of the banking sector — including Big Four rivals Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) — have been cooling off, too. That caused a lot of alarm, but it’s not often that mega-banks act like fast-growing dot-coms.
And besides, it was for good reason. Much of the enthusiasm over President Donald Trump’s promised financial deregulation waned as his other policies began to lag, leaving many to wonder when exactly a freer, easier environment for banks would open up.
Still, that leaves investors wondering: What can we expect out of BAC stock now? Is the giant bank still a value, or is the recent flatlining a sign that investors should still be cautious.
I don’t think the bull run is over, and I have three reasons why.
Reason #1: Bank of America Is on Solid Footing
If it wasn’t for the help of the federal government, BofA might not be around today. The company had deep exposure to toxic mortgages, thanks in large part to the disastrous Countrywide Financial acquisition.
Yet Bank of America has made tremendous strides in restructuring the overall business, including deep cuts in headcount and its retail footprint. BAC also has implemented more rigorous systems to better manage risk.
BofA is very different than it was 10 years ago, but don’t get the impression that it lost all of its tremendous scale. Consider that Bank of America still boasts …
- 47 million consumer and small business relationships
- About $2.6 trillion in assets
- Roughly 1 million high net worth clients
Bank of America also has made important investments in new technologies, amounting to about $3 billion per year. The results are there, too, as the bank boasts 22.2 million mobile customers and 34.5 million active digital users. These consumers have been drawn in by innovations such as P2P payments (via the Zelle app), its artificial intelligence unit (Erica) and cardless-enabled ATMs.
Reason #2: Net Interest Income
Net interest income is at the heart of Bank of America’s performance. NII is calculated as the difference between the revenues of core banking services — such as providing loans — and the costs of paying interest on deposits.
Historically low interest rates after the financial crisis have been a major drag on the performance of BAC stock. But the Federal Reserve has been changing its policies, engaging in more tightening. It’s difficult to predict interest rates, but some important factors should keep them on the rise. Unemployment — though it decelerated in May — is still at all-time low levels, and the Fed also wants to lessen its balance sheet.
The interesting thing about the net interest income is that the fees on deposits tend to remain depressed whereas loan rates have much larger increases. The result is a nice expansion in margins.
This has made a difference for BofA. In its first quarter, NII jumped by 7.4% sequentially to $11.058 billion, far ahead of BAC’s own forecast of $600 million.
As net interest rates go up, so do the fortunes of Bank of America.
Reason #3: BAC Stock Is Cheap
Bank of America remains one of the best values in the banking business. At the moment, BofA shares trade at around 10 times forward earnings estimates, and just 93% of book value.
Thing is, Bank of America might not even need a multiple expansion to head higher once more. The bank has plenty of earnings power from rising interest rates, and it should see ongoing benefits from noninterest businesses like trading and investment banking, which themselves should grow as the economy continues to expand.
And an underappreciated driver is increased sponsorship from top-notch investors, such as Appaloosa Management’s David Tepper, who has a great track record with financial stocks. During the past quarter, he purchased more than $200 million in BAC stock — likely near its 52-week highs.
And BAC stock is a much better value than that today.
Bottom Line
The market is acting timid while Wall Street waits for Trump and the GOP to deliver on their promises. In the meanwhile, these bullish drivers are just kindling waiting for a spark.
Any positive news out of Washington, or another interest-rate hike later this year, should be all the market needs to send BAC stock back into rally mode.
Tom Taulli runs the InvestorPlace blog IPO Playbook as well as OptionExercise.com, which provides interactive tools & services for employee stock options of pre/post IPO companies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
