Thinking about this past week’s news of the first major bank deal since the financial crisis — that is, the tie-up of BB&T (NYSE:BBT) and SunTrust Banks (NYSE:STI) — it’s clear that in financial services, size matters. The all-stock deal will create the sixth-largest U.S. bank with more than $440 billion in combined assets.
Sure, one driver for the deal is a more-favorable regulatory environment. But it also looks like the combination of BBT and STI is mostly about fending off the mega banks.
If anything, this is validation that the bigger, the better in financial services. So when investors are looking for opportunities, it seems like a pretty good bet to focus on those that are the leaders. This is why I think Bank of America (NYSE:BAC) represents a good opportunity right now.
After all, just look at the most recent earnings report. Profits came to 73 cents a share — tripling to a record $7.3 billion — and revenue hit $22.7 billion. By comparison, the Street was looking for 63 cents for each share of BAC stock and $22.4 billion on the top-line. Those numbers spiked Bank of America stock more than 7% on the news.
The net interest income key metric was 2.48% (this is the difference between what BAC lends on its money and what it pays its depositors). Essentially, the large deposit base has remained fairly stable despite changes in interest rates.
BAC Stock and the Economy
The fact remains that BAC stock is mostly tied to the fortunes of the U.S. economy. And yes, this is certainly a good thing because much of the rest of the world’s economies aren’t growing the way they’ve been in recent years.
A great indication of the strength of the U.S. economy is how BAC’s consumer banking segment performed in the quarter. Keep in mind that the division posted earnings growth of a sizzling 52% to $3.3 billion. There was also a 6% increase in debit and credit card use.
But when it comes to BAC stock, it’s also important to consider that BofA has a thriving wealth management business, which includes Merrill Lynch and U.S. Trust. Despite the bear move in the fourth quarter, the segment still posted a 7% increase in revenue to $4.99 billion. That stands in sharp contrast to peers, such as Morgan Stanley (NYSE:MS), Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM), which reported declines.
To be sure, BAC still has some issues, such slow-growing trading revenues, up a mere 1% in the quarter. The main culprit was a 15% plunge in the fixed-income segment. Then again, the trading business is often volatile and tough to manage.
Bottom Line on BAC Stock
When it comes to Bank of America stock, there is more than just scale. The company has been smart to invest substantial amounts into digital technologies. BAC is becoming a top player in the fast-growing fintech market.
It has about 36.3 million active digital banking customers, of which 26.4 million use their mobile devices to access services. Roughly 19% of consumer mortgage applications come from digital channels.
The Zelle peer-to-peer payments app has also been getting lots of traction. On a year-over-year basis, volumes soared by 97% to $14 billion. What’s more, BAC is seeing success with its digital assistant, Erica, which has 4.8 million users.
Granted, the fintech efforts are still in the early phases. But the innovations should help with long-term growth. In the meantime, BAC stock has the advantages of a stable business that should continue to benefit from the growth in the U.S. economy. Bank of America management remains focused on cost cutting and rationalizing the physical branch footprint. In other words, for investors looking for a bank with multiple positive drivers, BAC stock fits the bill.
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.
