Among the largest domestic money center banks, Dow component JPMorgan (NYSE:JPM) is the undisputed king, and not just because it’s the biggest of the bunch. Led by CEO Jamie Dimon, the banking industry equivalent of a rock star chief executive, JPM has delivered solid returns, even in years when financial services stocks lagged.
Investors looking for a prince to JPM’s king may want to consider Bank of America (NYSE:BAC) as that company is the second-largest U.S. bank by assets. In fact, the stock’s nearly 2% slide Wednesday following the bank’s fourth-quarter earnings report could be the buying opportunity investors that missed out on BAC’s 2019 surge have been waiting for.
To be sure, Bank of America’s Q4 numbers weren’t dreadful. For the December quarter, BAC earned 74 cents a share on revenue of $22.5 billion, beating analysts estimates calling for earnings of 68 cents a share on revenue of $22.35 billion. For 2019, the bank earned $2.75 per share on revenue of $96.39 billion, up from $2.61 on turnover of $91.2 billion in 2018.
“The company managed well through a period of transition from rising rates to lower rates over a short period of time. Solid client activity in growing loans and gathering deposits helped us offset spread compression,” CFO Paul Donofrio said in a statement.
Predictable Problem, But Fixes Are There
As has been broadly discussed, dating back to last year, the problem for the BAC’s and JPM’s of the world is net interest margins in an environment of lower interest rates. Net interest margins are the spreads on what banks make from loans and the interest on deposits doled out to customers.
Put simply, net interest margins explain why bank stocks are, historically, inversely correlated to interest rates. With the Federal Reserve having pared borrowing costs three times last year, it’s not surprising net interest margins are being crimped. Bank of America confirmed that will be the case in the first half of 2020 before a rebound occurs in the second half of the year.
A strong U.S. economy, mentioned by CEO Brian Moynihan on the earnings call, could be the tide that lifts the BAC boat in the latter stages of 2020. It goes without saying that strong equity markets help Bank of America because it’s one of the largest investment banks. It also has deep penetration in the financial advisory and wealth management businesses due to its Merrill Lynch acquisition, which was deemed as ill-fated more than a decade ago.
As Harvard Business School notes, that deal almost didn’t happen due to Merrill’s rapidly deteriorating health in late 2008. After some bumps along the way, the purchase has paid off for BAC because Merrill Lynch has enviable brand recognition and positioning in the U.S. brokerage and advisory businesses.
Even if the economy slows or markets become jittery as the November presidential election draws closer, Bank of America could prove sturdy thanks to previous efforts to scrap slack underwriting standards and focus mostly on higher credit quality borrowers.
Bottom Line on Bank of America Stock
At just 11.36x forward earnings and a mere 1.27x book value, Bank of America stock is inexpensive, as is the case with many of its rivals. More importantly, the company has avenues to buffer against the pinch of lower interest rates.
“Overall, despite slower revenue growth, Bank of America still had a lot of strong points during the quarter,” said Morningstar in a recent note. “Consumer deposits, investment assets, payment volumes, and digital engagement all continue to grow. Global wealth and investment management continues to see client balances grow at a strong rate, up 16% year over year, driven by AUM flows and growth within brokerage.”
Barring an unforeseen severe reversal in the U.S. economy, Bank of America offers investors the potential for another year of market-beating gains along with the likely prospect of higher dividends and increased share buybacks.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
