It took forever, but Bank of America Corp (NYSE:BAC) finally shook off the financial crisis and has been plowing ahead for some time. BAC stock has done very well over the past year and, last Friday, BAC stock was actually up while the Dow suffered a 666-point decline.
Alas, BAC stock took at 5% hit on Monday, but when the market is cratering, it would seem odd if BAC didn’t fall along with it.
However, whenever this latest correction ends, it may be a good idea to pick up some BAC stock based on what’s coming down the pike.
Future Looks Bright for BAC Stock
Some investors think that rising interest rates are bad for banks. In fact, they work out very well for banks. Even though rates are rising, banks take in deposits and pay very little interest on them. They then use that money to lend out at even higher rates. Thus, net interest income rises.
If you look at Bank of America’s net interest income, it was about $10.3 billion in the fourth quarter of 2015 and soared to $11.6 billion in Q4 of 2017.
Credit Cards Boosting Bank of America’s Bottom Line
Also, Bank of America stock has been benefiting because consumers keep soaking up debt via credit cards. In Q3 of 2011, after the financial crisis hit and consumers began defaulting and paying off credit big time, the total credit card outstanding balance was $660 billion. Six years later it is $808 billion. 383 million accounts in 2011 is now 466 million accounts. Bank of America alone saw a 7% increase in card usage.
With credit cards come both annual fees and high interest rates, paid by consumers who carry balances.
More Solid Loans
On the macro side, meaning all lending at B of A, $880 billion of loans were issued in 2015, rising to $905 billion in 2016 and hitting $930 billion in 2017. These loan balances increased on the back of increased deposits. $1.19 trillion of deposits hit $1.293 trillion last year. Incredible growth.
That’s all well and good, but all those loans better have solid underwriting. We don’t want a repeat of 2009, do we? Sure enough, non-performing loan balances have been steadily decreasing. Again looking at Q4 of 2015, bad loans were about $9.9 billion, falling to only $6.75 billion in the last quarter.
There’s another metric that one needs to look at with banks and its called the Efficiency Ratio. It asks how much money is needed to generate each dollar of revenue, expressed as a percent. In Q4 of 2015, it was 73% — 73 cents of expense was needed per dollar of revenue. It fell to 66% in 2016 and was down to 62% in the last quarter. Banks that can get their Efficiency Ratios under 60% are noteworthy.
Now, it remains to be seen how hawkish the Fed will get in the face of this market meltdown, but even a 1% rise in rates will push net interest income up by about $3.1 billion per year. Meanwhile, BAC’s non-performing loans should continue to trail off and I figure they will be under $6 billion easily by year end.
So, keep an eye on Bank of America stock, as you may get a chance to get in at a great price in the coming days or weeks.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected]