Bank of America Corp (NYSE:BAC) has pretty much stalled out after a post-election rally. Even with some strength the past few sessions, BAC stock has risen just 7% YTD, underperforming the market as a whole.
That’s a somewhat surprising result; one would expect financials to lead a bull market, not lag it.
And while BofA has bested financial rivals like scandal-plagued Wells Fargo & Co (NYSE:WFC) and investment banks like Goldman Sachs Group Inc (NYSE:GS) — which is down YTD — its performance is a bit disappointing in the context of the overall market.
For now, that’s OK. It leaves Bank of America stock still at a discount to fair value, and leaves a buying opportunity for long-term investors. Concerns about lower trading profits in Q2 appear to be hitting financial stocks, and longer-term regulatory worries still weigh. But BofA is priced for basically zero growth, anyhow, and those fears look a bit overwrought. The bank is executing well, and its market position is sound.
As long as that holds, BAC stock will come around eventually.
Near-Term Risks to BofA
There are basically three core risks to Bank of America shares at the moment, at least in the media narrative.
The first is that trading profits are likely to be quiet in Q2 at least, for BofA and other financial peers. There is little volatility in the equity and, in particular, the debt markets. That squeezes margins and profits for big banks.
Indeed, bank CEOs — including Bank of America chief Brian Moynihan — have already warned of potentially weaker-than-expected Q2 results. But Moynihan still predicted that the bank would post a year-over-year increase for the first half, after a strong Q1.
More broadly, these worries are rather short-term. A weak quarter for trading profits doesn’t imply a long-term change in the earnings outlook. Nor is it a sign of some sort of deficiency or increased risk in the business. It’s simply a quiet quarter.
The second, similarly near-term risk, appears to be interest rate hikes. Coming out of the election, expectations generally were for three Fed rate hikes this year. Those predictions have come dropped to two, with a likely increase this month and another possibly not until 2018. That slower pace does hit BofA’s net interest income, potentially 2017 EPS, and thus could impact shares.
But again, that’s a short-term — and short-sighted — concern.
Assuming the rate hikes do come as planned, but later, the fair value of BAC stock barely changes (at least in theory). Certainly, the lack of a June hike could rattle BofA and other bank stocks. That aside, however, net interest income still should benefit from higher rates this year — and have an additional driver next year.
That seems like more than enough given that BAC stock still trades rather cheaply, at just 11x 2018 EPS estimates.
Bank of America Going Forward
The longer-term risk — and opportunity — is in regulatory movements.
President Donald Trump has given contradictory statements on his plans for the big banks. But he once again hinted at a potential breakup as recently as May, only for his party to pass a bill that looked to roll back the 2010 Dodd-Frank banking law.
Trying to handicap the impact of politics on BofA is close to impossible at this point. But the most likely conclusion seems to be the status quo.
The Trump Administration still hasn’t pushed any major legislation through Congress. Bank of America and its peers have immense lobbying clout on Capitol Hill. A Dodd-Frank rollback could cause some near-term volatility in bank stocks, if only because of the potential uncertainty of the bill passing — and what, exactly, might be in it. But its goal is to limit regulatory costs and allow banks to lend more freely — and, in theory anyway, that should be a plus for BAC stock.
More importantly, BofA is reasonably well-positioned for any regulatory outcome.
The core consumer banking franchise is healthy, with charge-offs at multi-year lows. The BofA Merrill Lynch unit appears to be performing reasonably well, even if its revenue and earnings lag those of Goldman and Morgan Stanley (NYSE:MS). A massive regulatory change is going to hurt BAC stock, to be sure. But it’s not a death knell for the company, either.
BAC Stock Is A Buy
There are risks here, to be sure. But there are opportunities as well, from higher Fed rates and potentially some regulatory help. Trading profits may be muted in Q2, and even beyond. But with shares trading at 11x forward EPS, it’s not as if there’s some massive profit growth being priced in.
Bank of America is being treated as if it will continue to just muddle along — despite 40%+ EPS growth in the first quarter, and despite opportunities for further growth going forward. If some of the risks do pressure earnings, and the bank does have to muddle along, BAC stock seems to hold up reasonably well.
But if those risks pass — or turn into opportunities — BofA’s run should resume.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
