Services and Top-Notch Management Are Behind the BAC Stock Revival

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Bank of America (NYSE:BAC) is up just over 29% year-to-date, putting it well ahead of the Financial Select Sector SPDR (NYSEARCA:XLF), the largest financial services exchange trade fund (ETF) and basically on par with JPMorgan Chase (NYSE:JPM), the largest domestic bank by assets. BAC stock is having a pretty good year.

Services and Top-Notch Management Are Behind the BAC Stock Revival

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Being able to mention BofA in the same breath as Dow component JPMorgan shows just how far the stock and the company have come in recent years under the stewardship of CEO Brian Moynihan and his management team.

Nearly left for dead during and immediately following the financial crisis, Bank of America stock has, in recent years, become a noteworthy redemption story a decade in the making.

The comparisons to JPMorgan have some merit if for no other reason than that both JPM and BofA are behemoth money center banks with slews of overlapping business lines. Still, BAC stock is dwarfed in size by rival JPM. The former has a market capitalization of $288 billion compared to the latter’s $403 billion.

While Bank of America stock may not reach the heft of JPM, at least not anytime soon, what should be more relevant to investors is that Moynihan’s company is on pace to become comparably profitable to JPMorgan Chase.

Bank of America stock is “kind of catching up, but within a couple of years they should reach a level of profitability similar to J.P. Morgan Chase,” said Edward Jones analyst James Shanahan in a recent interview with MarketWatch.

Impressive Resilience

As has been noted regarding Bank of America stock and shares of other money center banks this year, lower interest rates are a drag on banks’ net interest margins. This is an issue BAC executives and rival management teams brought up during their second-quarter earnings calls, ahead of the Federal Reserve’s two rate cuts, and one that popped up again on third-quarter calls.

Net interest margin is the difference between the interest income a bank generates through loans and what it must pay out in interest to its depositors. Although lower rates punish savers, the scenario is also thorny for banks because it means they’re lending money at lower rates, too. Not surprisingly, the topic was discussed on BAC’s recent third-quarter earnings call.

According to BofA CFO Paul Donofrio:

“As you know lower rates are a headwind. The Fed cut short-term rates in July and September and average long end rates are down over 100 basis points year-over-year. However, versus the linked quarter GAAP NII was flat. There were two primary negative impacts to NII in the quarter. First, lower short-term rates reduce yields on floating-rate assets, and second, because of lower long-term rates, we experienced faster prepayments on mortgage-backed securities, increasing the level of bond premium write-offs.”

During the quarter, BAC stock was supported in part by $7.6 billion in share buybacks, which accounted for the bulk of the company’s $9 billion in capital returned to shareholders. Bank of America stock dividend has bounced back from the post-crisis doldrums seen a decade ago and today the shares yield 2.27%, more than the S&P 500 or 10-year Treasuries.

Bottom Line on BAC stock

While Bank of America stock faces an obvious headwind in the form of lower interest rates, the company isn’t alone in that boat. Additionally, commercial lending remains robust, a sign the U.S. economy is on solid footing.

Again, according to Moynihan on the recent earnings call:

“Over the last year, we’ve grown small business loans 6% regaining our market position as the number one lender to small businesses in the United States,” “Supplying capital small business is very important as they are the key driver employment in the U.S. another portfolio with our commercial loans and leases book is our global equipment financing portfolio. Growth in this portfolio is a sign that commercial clients have invested – are investing capital in the U.S. economy at a faster pace in the overall economic growth. This portfolio is $65 billion, and it grew $6.5 billion-plus or 11% in the past 12 months.”

Bank of America has also been a prodigious cost-cutter in recent years, much to Wall Street’s approval, and the shares trade at just 1.18x book value, confirming the value tilt in this bank name.

Todd Shriber owns shares of XLF.

Todd Shriber has been an InvestorPlace contributor since 2014.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/services-management-bac-stock-revival/.

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