Why Bank of America Corp (BAC) Stock Can STILL Make It to $30

Potential deregulation among banks can unlock almost $30 billion in gross profit at the nation’s six largest banks such as Bank of America Corp (NYSE:BAC). This would increase their annual pretax profit by about 20%, according to Bloomberg. BAC stock, which I’ve forecasted could rise to $30 in the next twelve months, would be one of the bigger beneficiaries of changes to post-crisis banking rules.

Why Bank of America Corp (BAC) Stock Can STILL Make It to $30

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That is, of course, if Donald Trump’s administration can get the rules passed. Bank stocks have underperformed other sectors recently, driven by instability in Washington and concerns that the president’s administration will continue to struggle to get its economic stimulus bills through congress.

BAC Stock: New Bank Rules Require New Outlook

As a result, the KBW Nasdaq Bank Index (INDEXNASDAQ:BKX) has declined almost 1.5% over the past month, dampening what has been broadly positive second-quarter earnings results from the likes of JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC). But there is now optimism that loosening bank regulations and proposed changes by Treasury Secretary Steven Mnuchin can serve as a near-term catalyst.

Among other things, these proposed changes would allow banks to increase their deposits and move a greater portion of their excess cash in areas that would generate higher-yielding Treasuries and municipal bonds, Bloomberg noted. Likewise, banks would also be able to issue a lower amount of debt that costs more than customer deposits, which would allow them to grow profits more quickly.

“They would be able to take on more deposits that they’ve been rejecting until now because of leverage constraints,” Brian Kleinhanzl, an analyst at investment bank Keefe, Bruyette & Woods, told Bloomberg. “They can invest that extra cash in Treasuries that are even longer in maturity than what they typically hold now to benefit from a better spread between deposit costs and bond yields.”

The biggest change, however, could be the new rule that allows banks to buy U.S. government bonds solely with borrowed money. And this makes Bank of America stock, which has fallen nearly 4% in six months, a solid bargain when projecting out to the next 12 to 18 months.

With some patience, BAC stock can reach $30, delivering some 27% returns from current levels.

Where Bank of America Stands Today

BAC continues to outperform its own stock, exceeding Wall Street’s revenue estimates in the previous two quarters, while topping earnings estimates in five straight. In the second quarter, earnings rose 10% as demand for its retail banking services generated higher deposits and interest income, demonstrating the extent to which the bank’s operating strategies are working. Bank of America reported a Q2 profit of $4.9 billion, while delivering a 9% rise in net interest income of $11 billion.

For some context, that performance ranked as BAC’s best quarterly profit since the arrival CEO Brian Moynihan in 2010. The solid quarter was driven by the strong performance of the consumer banking unit, which not only delivered a 9% jump in Q2 revenue of $8.5 billion, but segment net income also surged 21% year-over-year to $2 billion. Thanks to an improved job market and consumer confidence, the unit benefited from a combination of higher deposits, which rose $652.8 billion and an 8% rise in loans.

Just as impressive, Bank of America delivered return on shareholder equity of 8%, topping last year’s mark of 7.4 %. Given the bank’s improved metrics, especially when combined with its strong showing in consumer banking, BAC is poised to benefit from incremental increases in net interest margins, assuming that the Federal Reserve increases interest rates in the quarters ahead.

For the third quarter that ends September, analysts expect Bank of America to earn 47 cents per share on revenue of $22 billion. This compares to the year-ago quarter when the bank earned 41 cents per share on $21.86 billion in revenue. For the full year, ending in December, earnings are projected to rise 21% YOY to $1.81 per share, while full-year revenue of $89.50 billion would rise 5.8% YOY.

Bottom Line for BAC Stock

There’s no question that — due to a low inflation environment and macro uncertainty — bank stocks have lagged the overall stock market over the past year. But given the  optimism of loosening bank regulations, the tide could quickly shift.

And in the case of Bank of America stock, which is priced at just 10.9 times fiscal 2018 estimates of $2.18 per share, it’s tough to find a better bargain on the market. And I continue to expect BAC stock to reach $30 in the next 12 to 18 months, delivering 27% returns from current levels.

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


Article printed from InvestorPlace Media, https://investorplace.com/2017/08/bank-of-america-corp-bac-stock-still-make-30/.

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