Bank of America Corp: The Biggest Opportunity in Banking? (BAC)

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Bank of America Corp (BAC) stock is all doom and gloom two months into 2016.

Bank of America Corp: The Biggest Opportunity in Banking? (BAC)Actually, that’s an understatement for BAC stock, which took a 20% belly flop since the new year arrived. BAC is underperforming against top Wall Street rivals and inflicting the kind of investor pain that even Tuesday’s 5% stock bounce back couldn’t ease.

The more talk there is around the possibility of negative interest rates, depressed oil prices and of the American economy’s tenuous growth, the riskier big banking stocks like Bank of America look to the average investor.

Yet, savvy investors take heart: BAC stock might be down year-to-date, but it’s far from out — and the near future could bring a big turnaround for this beaten-down bank.

BAC Stock: The Big Worries

First off, the big picture: Interest rates aren’t heading skyward any time soon.

While negative U.S. interest rates still look more fantasy than fact despite Federal Reserve Board Chair Janet Yellen noting last month that negative rates haven’t been ruled out, the American economy’s weakness means that any hopes for rate hikes in 2016 are a coin flip at best.

Sour fourth-quarter annualized GDP growth of a mere 0.7%, combined with a lingering lack of consumer confidence according to a recent Gallup poll, paint a fragile picture of the U.S. economy.

BAC stock certainly isn’t helped by the effects of depressed rates and economic doubt: As the company noted in its most recent 10-K, non-trading related net interest income dropped off in 2015 by nearly 3%, the decline aided by a fall in loan yields and consumer loan balances, though net interest income did manage a 2% comeback gain in the fourth quarter. As a strong economy and a higher demand for loans and financing go hand-in-hand, any prolonged sluggishness in the U.S. economy is bad news for Bank of America.

Interest rates aren’t the only problems for BAC stock, however. The fallout in oil prices makes the bank’s exposure to the energy sector a risky one. In the company’s most recent quarterly earnings release, it noted increased charge-offs in the energy sector of its portfolio as a major contributor to a jump of 30% in net charge-offs year-over-year.

Oil prices aren’t likely heading north in a hurry, and the energy sector’s weakness should remain a sore point for BAC stock and shares of other top banks.

However, if the U.S. economy can shake off the fourth-quarter’s woes and return to respectable growth — a notion buoyed by Tuesday’s relatively upbeat manufacturing report from the Institute for Supply Management combined with the report that January construction spending notched an eight-year monthly high — Bank of America is primed to capitalize.

While Bank of America can’t control the broader economy, it has done a great job of boosting its financials over the past few years.

Bank of America: Building Back Its Strength

In 2015, the company notched five-year highs in earnings per share, book value per share and return on average assets. While the bank’s ROA still trails many of its top banking rivals, 2015’s return more than doubled the bank’s 2014 result.

The bank hiked its prime lending rate back in December by 25 basis points after the Fed’s rate raise, a move that will help ease some of the interest rate-related pain on loans in 2016 and bolster BAC stock’s performance in the long run.

Bank of America has also had no problem generating more loans as of late, even as investors nervously watch over the company’s energy sector-related loans. Average loans and leases jumped 12% YOY in its Global Banking segment last quarter and climbed 10% in its Global Wealth and Investment Management group.

Combined with strong growth recently from the company’s Global Markets group — responsible for 16% of total company revenues and managing 31% revenue growth last quarter — the strong business should bode well for BAC stock’s long-term outlook.

The company’s cost-cutting measures have also been a breath of fresh air after its plethora of post-recession settlement costs and charges. Sources close to Bank of America reportedly have eyes on job cuts in trading and investments in the near future according to a recent release from Business Insider, continuing a trend of slashing expenses to cut down on bloat and make the bank more nimble.

Like with growing revenue, that’s a solid marker for BAC stock’s long-term health, and a good indicator for the bank’s improving net income and return on assets.

Overall, will BAC stock make a drastic turnaround in 2016?

Don’t count out sluggishness from this big bank as the economy continues to find its footing, oil prices stay submerged and the Federal Reserve frets over raising interest rates.

It will likely take time for Bank of America’s shares to show the growth in the fundamental business and financials that’s underway, as well as to capitalize on economic growth and a consumer and business base still financially wary.

For opportunistic long-term investors, however, BAC’s drop-off is a great chance to get in on a company building up for the future … and a stock that could ride that trend all the way to the bank.

As of this writing, Dan Carroll did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/bac-stock-bank-of-america/.

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