Throughout 2019, Bank of America (NYSE:BAC) tried but failed to break out above the $30 level on the stock market. The Federal Reserve is now loosening interest rates, which pressures bank earnings on interest rate spreads. And the upcoming earnings report season for banks — starting this week — is unlikely to move financials. Analysts have low expectations for JPMorgan (NYSE:JPM), Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC). So, when it reports earnings, how will Bank of America stock react?
Analysts expect Bank of America will report 51 cents a share in earnings, down from 66 cents in the year-ago quarter and also down from 74 cents last quarter. Progress on its stock buyback and the potential for a dividend increase may send the BAC stock price back to the $30 range following its earnings report.
Macroeconomics Look Favorable for BAC Stock
On a macro level, the sharp drop in the 30-year Treasury bond, which fell 3.8% last week, is positive catalyst for the financial sector. Yields rose ahead of the meeting between President Donald Trump and Chinese Vice Premier Liu He. Bonds also fell when markets interpreted the Fed minutes in more detail. The Federal Open Market Committee may take a less accommodative interest rate policy than markets are expecting. But even though a 25 basis point rate cut is less likely this month, the odds of it happening are still very high.
If the pace of rate cuts eases after this month, investors are inclined to buy the top financial stocks that include Bank of America. The stock yields 2.5% and could rise 18% in the next 12 months if analyst price targets play out.
Bank of America has a diversified business model that scales in every business. In the first half of 2019, consumer banking revenue was 41% of the total ($19.3 billion). It also brought in the most profit ($8.7 billion). By investing in technology, the bank connected across business lines to deepen client relationships. This should increase repeat business and will lift its organic revenue growth.
Accelerating client business growth will also require Bank of America investing in more staff. It continues to invest in digital to increase efficiency and client experience. But the biggest return will come from increasing its relationship/sales coverage to provide better services to its customers.
By buying BAC stock, investors hold a global market leader. The bank is active in 35 countries. It raised $353 billion in capital for clients globally in the first half of 2019, processed over 30 million average trades a day, and has a healthy customer base. This includes a relationship with 77% of Global Fortune 500 and 95% of U.S. Fortune 1000 companies.
In the upcoming earnings report, look for an increase in return on allocated capital. This rose by 4 basis points since 2015, to 19% in the first half of 2019. Although net income fell from last year in the first half of the year, lower expenses and higher revenue may lead to an earnings beat. Even if earnings fall again, Bank of America continues to grow its loans and leases as well as its deposits. This also increased in its international banking subsidiary.
Ongoing investments in global transaction services will keep Bank of America a relevant player in the digital transactions market. Its top three areas of investment are real-time payments, data and analytics as a service and CashPro. With user growth of 94% in the first half this year, investors might argue that it is safer to hold BAC stock than PayPal (NASDAQ:PYPL) or Square (NYSE:SQ).
My Takeaway on Bank of America Stock
Bank of America is an appealing investment regardless of results from the upcoming earnings report. Getting to a $34 price target is achievable. Savvy investors may assume less aggressive revenue growth estimates and still conclude that the stock is appealing at current levels.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.