3 Reasons Bank of America Corp Stock Has More Upside

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BAC stock - 3 Reasons Bank of America Corp Stock Has More Upside

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The recent correction in the equities markets has proven to be mostly a blip for Bank of America Corp (NYSE:BAC). Note that the shares have recovered most of its losses. In fact, for the year so far, BAC stock is up about 9% and is near its 52-week high.

OK then, so what now? Can Bank of America stock continue to post strong returns? Well, I think so. If anything, the economic environment in the U.S. looks particularly attractive for financials. And more importantly, BAC has a strong platform that should allow the company to remain a leader for the long term.

Now this is not to imply that BAC stock will repeat the kinds of gains during the past couple years (during this period, the shares have gone from $13 to $32). After all, the valuations were at depressed levels.

But then again, investors still have the opportunity to get competitive returns. So let’s take a look at three reasons why Bank of America stock still has upside.

Advantage #1: The Economic Environment

The U.S. economy shows few signs of slowing down. According to the IMF, it has increased its GDP forecast by 0.4% to 2.7%. Some of the drivers include the wide-ranging tax reform bill and the federal budget, which is likely to provide more stimulus. No doubt, this kind of environment will mean higher demand for loans and other financial products.

Next, BAC is likely to benefit from the Trump Administration’s focus on reducing regulations. Such moves should help boost the bottom line.

Yet perhaps the most important factor for Bank of America is interest rates. The reason is the net interest income, which is calculated as the difference between the revenues of core banking services — such as providing loans — and the costs of paying interest on deposits.

Keep in mind that the Federal Reserve has indicated it will continue to raise interest rates to keep inflation in check and also to unwind some of the policies instituted to deal with the financial crisis.

To put things in perspective, a 1% increase in interest rates will mean $3.4 billion in net interest income or 20 cents per share in earnings for BAC stock.

Advantage #2: A Powerful Platform

CEO Brian Moynihan has certainly done a great job in restructuring BAC. A big part of this has been cost cutting and unloading non-core businesses.

But in the meantime, he has been able to improve the platform, allowing the company to pursue growth opportunities. Consider the following about BAC:

– The bank has the highest consumer deposit market share in the U.S.

– BAC is No. 2 in small bank lending and retail mortgage originations.

– There are 24.2 million mobile banking active users, up 12% on a year-over-year basis

– The firm is No. 1 in wealth management across client assets.

By having this kind of scale, BAC is in a position to realize economies of scale and also to have the resources to invest in strategic categories.

Bank of America may also have an opportunity to bolster its market share. The reason is that the Federal Reserve has imposed draconian measures on Wells Fargo & Co (NYSE:WFC), which has included caps on its growth rate.

Advantage #3: Attractive Valuation for BAC Stock

BAC stock is trading at an attractive valuation. Consider that the forward price-to-earnings ratio is 11x, which is in line with other mega banks like JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C).

OK then, but what about the dividend on BAC stock? Isn’t it fairly meager? This is true, as the yield is 1.54%. But as the company continues to grow, it would not be a surprise to see more dividend increases for years to come.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Tom Taulli is the author of various books. They include Artificial Intelligence Basics and the Robotic Process Automation Handbook. His upcoming book is called Generative AI: How ChatGPT and other AI Tools Will Revolutionize Business.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/3-reasons-bank-of-america-stock-has-more-upside/.

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