The downtrend in financial services is on pause, at least for the time being, with Bank of America (NYSE:BAC) leading the June mini-rally. BAC stock is up 4.4% for the month, while the S&P 500 index (NYSE:SPY) has gained 2.5%.
Talk of interest rate cuts by Federal Reserve chief Jerome Powell ignited a strong rebound in stocks. Fundamentally, rate cuts hurt interest rate spread for banks and weaken profits. Conversely, a growth in economic activity also brings more deals for banks. Further speculation of U.S.-China trade tensions easing is sparking stock rallies. Yet even though investors cannot count on a resolution, they should consider buying Bank of America for many other ideas.
Leading Financial Services Firm
At a Deutsche Bank Global Financial Services conference at the end of May, Bank of America highlighted its leadership in consumer financial services. It has 63 million clients, 16,000 ATMs, and is the top 20 most-profitable firm in the S&P 500.
In the last three years, the bank grew revenue by 20%, to $37.6 billion at the end of 2018. It achieved this strong growth in four ways. First, it repaired the client experience, rebuilding loyalty. Second, it offered a customized client experience through client segments. Third, it embraced high tech. Fourth, it replaced core infrastructure. This led to an impressive 21 consecutive quarters of positive operating leverage.
Contrarian Client Focus
Nearly half (45%) of Bank of America’s clients are retail clients with an annual income of less than $50,000. BAC takes a no-nonsense approach with this group, minimizing fees while delivering services through its digital capabilities. By keeping costs in maintaining each customer low, the bank has the flexibility to offer value-add education. BAC’s “Better Money Habits” is an example of such an initiative.
Small business owners account for around 20% of its clients. This group has annual business revenue of under $5 million. So, as their needs grow, BAC connects them with its client professionals.
Preferred clients make up the remaining 35% of clients. This group has more than $100,000 in assets and happens to skew toward the older crowd. Here, BAC offers advice and guidance through its network of client professionals.
Digitization Underway
Markets tend to have a willingness to pay a big premium for electronic payment firms like PayPal Holdings (NASDAQ:PYPL) or Square (NYSE:SQ). BAC is already servicing its clients with a digital bank offering. The firm is ranked #1 in share rankings for consumer deposit share in the U.S. Its digital bank allows clients to access their account securely, through Touch ID and debit lock/unlock. Payments can be processed through Zelle, Mobile Wallet, and Mobile Check Deposit.
Bank Branches Upgraded
Despite investing in its digital bank, BAC is not ignoring its brick-and-mortar network. It continues to invest in and expand the branches. The upgraded physical banks give customers a touchpoint with a staff of professionals, should they need face-to-face support. BAC’s financial center network is so far ahead of the competition that the share of deposits/financial centers is 1.75x-2x while competitors only operate at 0.75x-1.5x.
Growth Opportunity Ahead
Bank of America will continue investing in both its digital bank and financial center network, integrating the two. That will simplify the offerings for customers. Similar to other banks, BAC will invest in high tech and high-touch capabilities.
Macroeconomic headwinds have yet to hurt BAC’s business, although the bank noted a slight slowdown in activity. But even though the economy is growing at 2% instead of 3%, consumers still account for two-thirds of the economy. And with low unemployment, the banking business is still very strong.
Takeaway on BAC Stock
BAC stock would have traded in the $30 – $32 range had the markets not sold off in May. Analysts are very bullish on Bank of America stock and have a price target of $35 a share. Plus, with the stock paying a dividend yielding 2.26%, investors seeking exposure to the bank sector should consider this bank today. Investors should also take note of the Invesco KBW Bank ETF (NasdaqGM:KBWB), which has BAC stock as its fourth-largest holding in its 25-stock bank shares portfolio.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
