To say Bank of America Corp (BAC) shares are off to a bad start for 2016 would be an understatement — BAC stock is off to a terrible start, having fallen more than 27% year-to-date mostly thanks to a combination of economic malaise in Europe, the growing risk of loan defaults (particularly from the energy sector), and insufficient asset bases to keep regulators happy.
In early February, it looked like a bottom may have been made. But after stewing on it for a few days, the market finally voiced its less-than-enthusiastic opinion regarding a generous raise for CEO Brian Moynihan by putting the downtrend back in motion.
Any chance BAC stock has already hit a trade-worthy bottom, even though it’s down a bit since the middle of last week? Broadly speaking, yes. After all, Bank of America shares are trading at a very palatable forward-looking price-to-earnings ratio of 7.1. Even if the outlook is a bit overly optimistic, that valuation leaves plenty of room for more upside.
BAC may be a bargain hunter’s buy right now, though it’s also a trade that will require a patient, long-term mindset.
Investors’ Worry About Bank of America
It’s an interesting contradiction. Although BAC shares are nearly down double-digits so far this year, the bank just wrapped up its most profitable year in decades by earning $14.4 billion. It’s a sign that whatever’s happened to spook current and would-be Bank of America shareholders, it has happened in just the past few weeks.
Of course, it’s not exactly a veiled secret — the company made it rather clear in its most recent quarterly filing from Jan. 19 that revenue growth continued to prove challenging; Moynihan’s comment “Although the U.S. economy is improving slowly, revenue growth remains challenging” in regards to Q4’s results doesn’t mince words. The market took them at face value.
Bank of America’s headwind isn’t necessarily the same one as, say the one working against JPMorgan Chase & Co. (JPM
). On Tuesday, JPMorgan Chase more than confirmed the market’s worst fears that it had become a little too friendly with the now-struggling energy sector. After setting aside more than $800 million to account for 2015’s loan losses stemming from oil explorers and drillers unable to repay their loans from the bank, JPMorgan added $500 million to that provision figure on Tuesday to reflect the bad loans it expects to suffer in 2016.
It could get worse, however, before it gets better. The bank warned that its energy-sector loans could reach $2.8 billion worth of losses before it’s all said and done if oil prices don’t recover soon.
That’s in contrast to Bank of America’s consumer-banking focus, but that doesn’t necessarily make BAC stock any less vulnerable to a headwind. In BofA’s case, the specific vulnerability is the likelihood that interest rates will remain low or sink even lower. Low interest rates hit retail banking and lending profitability particularly hard, as it shrinks the profit margins on loans.
And for perspective, the yield in 20-year Treasury bonds — a highly watched barometer of yields as a whole — has fallen from 2.64% to 2.16% year-to-date. That’s a massive move (in the wrong direction for BAC stock) by interest rate standards.
To Buy or Not to Buy BAC Stock?
So yes, Bank of America is facing some challenges above and beyond the broad economic malaise and risk of a recession, and even beyond rising loan defaults. But, as is so often the case in the stock market, things are rarely as bad as they’re supposed to be, and the bulk (if not all) of the aforementioned risk has already been factored into the price of BAC stock.
Underscoring this underappreciated name’s upside is recent news that Bank of America, along with its retail brokerage arm Merrill Lynch, recently won nine awards from industry publication Treasury Management International in recognition of how well the organization managed its liquidity, performed payment services and the like.
It’s not a publication or an award most investors care about, or have even heard of. It is a small piece of evidence that, at the very least, BofA has mastered the processes involved in the business of banking. The same operational fitness should get it through whatever lull weak interest rates could throw at the company.
All the same, to the extent Bank of America needs to be more than just a logistical poster child, the company’s new 3% down-payment mortgage loan says it knows how to meet consumers where they want to be met.
As has always been the case, BofA “finds a way” — that, and a single-digit valuation, make BAC stock at least a bit compelling for investors looking for a longer-term play.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
