Bank of America Corporation (NYSE:BAC) — despite rising more than 6% in the past couple weeks and still trading near 52-week highs — still looks like a solid bargain when projecting out to the next 12 to 18 months. In fact, with some patience, BAC stock should be able to reach $30, delivering some 20% returns from current levels.
The Charlotte, North Carolina-based bank has been one of the beneficiaries of the recent sector rotation. We’ve seen investors shift money from high-flying techs into under-performing sectors like financials.
This run on bank stocks — which has sent the KBW Nasdaq Bank Index higher — also has been fueled by broadly positive Q2 earnings results from Bank of America’s too-big-to-fail peers, including JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC).
Heading into the second quarter, financials delivered positive results on their Comprehensive Capital Analysis and Review (CCAR) tests, which dissect banks’ capital planning processes to make sure the need for a future bailout from taxpayers, helping to spark this move. In the case of BAC stock — which has risen 13% year-to-date, while climbing 72% in 12 months — the bank is no longer in “recovery mode” and has evolved toward sustainable growth.
Bank of America’s second-quarter results — during which earnings rose 10% as demand for its retail banking services generated higher deposits and interest income — revealed several working strategies.
The bank logged a second quarter profit of $4.9 billion, compared with $4.4 billion a year ago, and delivering a 9% rise in net interest income of $11 billion. This yielded 46 cents in earnings per share, which beat the 44 cents analysts were looking for.
For some context, this quarter ranked as BofA’s best quarterly returns since CEO Brian Moynihan has been in that position. Notably, BAC delivered return on shareholder equity of 8%, topping last year’s mark of 7.4%. And while the 8% still trails the bank’s cost of capital of around 10%, it has been a decade since it has sported ROE this high.
Bank of America’s solid quarter was driven by the strong performance of the consumer banking unit, which not only delivered a 9% jump in Q2 revenue to $8.5 billion, but segment net income that 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% improvement in loans.
With such a strong showing in consumer banking, BAC was able to offset weakness in other parts of the business, such as the investment banking unit, which reported an 8% revenue decline to $3.9 billion. That was led lower by a 14% decline in fixed-income trading.