Financial stocks like Bank of America Corp (NYSE:BAC) were among the biggest beneficiaries of the post-election rally in the equity markets, but the rally has stalled out so far in 2017. Year-to-date, BAC stock is up just 5.5%, despite a strong Q1 earnings report last month.
But BofA stock actually has bested other mega-cap rivals: Morgan Stanley (NYSE:MS), Wells Fargo & Co (NYSE:WFC), and Goldman Sachs Group Inc (NYSE:GS) are mostly down YTD, with GS stock off nearly 8% and MS up only 0.5%.
That’s a somewhat surprising performance for the macro-sensitive sector. With broad markets near all-time highs, one would think financials would be performing better. Large post-election gains may have priced in much of the gains from higher interest rate expectations and the potential for lighter government regulation. But there still seems to be room for optimism toward financial stocks to increase.
That seems particularly true for BAC stock. BofA is benefiting from higher net interest income, but its execution has been impressive as well. With the stock still trading at very cheap earnings multiples, similar performance from Bank of America going forward will mean more upside for its stock.
Bank of America Continues to Impress
In terms of what it can handle, BofA has done a nice job of late. Higher interest rates did benefit net interest income in Q1 and boosted earnings-per-share. But it also posted strong trading results in Q1. Portfolio management looks solid as well. Charge-offs declined year-over-year, as did the net ratio; BAC’s provision for credit losses declined an impressive 16% year-over-year.
Meanwhile, expenses were held flat YOY, driving operating leverage. All told, Bank of America’s Q1 looked strong across the board, with EPS increasing 41% YOY. BAC stock did gain on the report, after some choppy trading, but it has already given back those gains.
That seems a bit short-sighted by the market. Obviously, BofA earnings aren’t going to rise 40% every year — or even this year. But Q1 numbers, as well as 2016 results, show a company performing on all cylinders. Bank of America is making more money and seemingly taking on less risk.
At the least, the outperformance of BAC stock relative to peers makes some sense. BofA doesn’t have Wells Fargo’s ever-widening account scandal. It’s a safer, more diversified business than Goldman or Morgan Stanley. And recent performance suggests the stock should continue to outperform the space. Meanwhile, there’s reason for optimism toward the financial sector going forward.
BofA Financials Should Improve
On occasion this year, commentary from President Trump and administration officials has rattled bank stocks. Investors seem most concerned about a potential break-up of major institutions like BofA, JPMorgan Chase & Co. (NYSE:JPM), and Citigroup Inc (NYSE:C).
Inconsistent commentary from Trump and his subordinates hasn’t helped. But the idea that a GOP Administration would threaten the positioning of major U.S. banks — and almost certainly cause a significant disruption in not only bank stocks, but the market as a whole — seems incredibly unlikely.
Meanwhile, macro and credit environments seem benign, at least outside of certain areas (mostly subprime and, possibly, auto loans). The housing market is continuing its slow recovery (and even is ‘hot’ in some areas). Macro optimism seems to have increased YTD, given broad market movements, yet financials have been left out of the rally. Barring a sea change, BAC and other sector plays should join in — at some point.
BAC Stock Looks Cheap
And I still believe Bank of America stock is the best play in the sector. It remains attractive from a valuation standpoint, as the stock still trades at a ~5% discount to book value. On an earnings basis, BAC stock is valued at under 15x 2017 earnings — and under 11x 2018 analyst estimates. Those multiples seem to imply either excessive potential risk and/or a near-term slowdown in profits — neither of which appears notably likely at the moment.
What’s particularly attractive about BAC stock at the moment is that the status quo should be good enough to drive appreciation. It’s not as if Bank of America needs to execute a turnaround, or re-build its brand. There isn’t some overhang of questionable assets or regulatory risk to get through.
Rather, BofA actually looks like investors and regulators want bank stocks to look these days: boring, quiet, stable and smart. That makes BAC stock perhaps not the most fascinating on the market, but it’s more than enough to move the stock higher.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.