Since mid-September, Bank of America (NYSE:BAC) stock has been mostly trending lower, as the shares have gone from $31 to $24.50.
But of course, investors have been selling off much of the banking sector. Just look at the poor performances of firms like JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo & Company (NYSE:WFC).
Part of the problem is that the overall markets have been correcting. But the flattening of the yield curve has also been a major factor (the yield curve flattens when short-term and long-term rates are at similar levels). This situation could portend a recession, which would certainly hurt the earnings of bank stocks.
But there is something else: A flattening yield curve also lowers interest income. In light of all this, it’s not surprising that Wall Street has been dumping bank stocks.
However, could the declines be overdone, creating good valuations? I think so. And Bank of America stock does look attractive right now. So let’s take a look at BAC stock:
The Impact of Interest Rates on BAC Stock
Despite the yield curve inversion, there are few signs of a recession on the horizon. True, the economy may be losing momentum. But CEOs generally remain upbeat and continue to hire new employees.
Won’t the flattening of the yield curve hurt BAC’s margins? Definitely. But the phenomenon may be temporary, since it appears that the Federal Reserve will continue to raise interest rates next year.
Besides, BAC does have a large, low-cost deposit base . Last quarter, the bank’s net interest margin came in at an attractive 2.42%, which was up from 2.38% in the previous quarter. The value of the bank’s deposits jumped 5% year-over-year in Q3.
BAC also has a diversified business, which includes lucrative streams of fee income. Among these are the investment banking division and the massive wealth management segment, which has about $2.8 trillion of assets under management. In fact, the wealth management business is ranked No. 1 in the U.S. in client assets, deposits, and trust assets.
The Impact of Scale on BAC Stock
When it comes to financial institutions, scale is absolutely critical. The industry is highly commoditized. So having a large base enables firms to reduce their per-customer costs.
BAC certainly has significant scale. It ranks No. 1 in U.S. consumer deposit market share and home equity originations.
In terms of the bank’s footprint, BAC has about 4,400 retail locations and 16,100 ATMs. But the company has also been aggressively building out its digital platform.
For example, the bank has more than 36 million active users and about 26 million people use the company’s mobile apps. The company’s peer-to-peer payments app, called Zelle, also has been showing good momentum. Since the app was launched in the second quarter of 2017, it has attracted 4.3 million users.
BAC Is Ready for a Downturn
BAC is much more prepared for the next downturn than it was for the previous one. The company has streamlined its operations, greatly improved its risk management systems and boosted its capital ratios. If anything, the knock against BAC is that it is too conservative!
The Valuation of BAC Stock
What’s more, the valuation of BAC stock is attractive. Consider that the forward price-earnings ratio of Bank of America stock is a mere 8.5. In other words, it looks like BAC stock already reflects much of the bad news about interest rates and the potential for a recession.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.