There’s no doubt that Bank of America (NYSE:BAC) stock has multiple, negative catalysts at this point. But the bank also has several positive drivers that should keep its profits from sinking very much in the medium term.
Over the longer term, these catalysts are likely to push BAC stock much higher.
Negative Catalysts
The trends that are likely to hinder Bank of America’s results are pretty well-known.
High unemployment and the bankruptcy of many small businesses will cause its credit card charge-offs and loan defaults to increase. Meanwhile, its credit card income will drop due to reduced spending spurred by both the recession and the lockdowns.
Interest rates will stay lower for longer, lowering the bank’s net interest margin. Consumers will take out fewer loans for cars and homes. Also weighing on its profits will be Bank of America’s need to meaningfully increase its allowances for bad debts.
The bank touched on most of these issues during its first-quarter results conference call on April 15. For example, CEO Brian Moynihan, indicated that it was hurt by “changes in interest rates …(and) lower discretionary payments for travel, leisure … and entertainment.”
The CEO reported that the bank had to increase its loan loss reserves by $3.6 billion as a result of charge-offs. He added that as the lockdowns began to be implemented, “we saw large declines in debit and credit card spending into other categories.”
Finally, Moynihan reported that “our loan production for cars, mortgage and other products has fallen week-by-week,” and the bank noted that its net interest income had fallen 2% from last year.
Positive Catalysts
One important thing to keep in mind is that, as I’ve stressed in previous columns, the vast majority of middle- and upper-income individuals in America have kept their jobs. That’s because, for the most part, the health care, finance, tech, and government sectors have, at least so far, not been hit much if at all by this recession.
Illustrating this point, the government reported on April 30 that personal income had dropped just 2% year-over-year in March. I know the crisis got worse in April, but I don’t think we’ll see a dramatic decrease of personal income in April either.
As a result, Bank of America won’t have to contend with the tsunami of credit card and mortgage defaults that hurt it and other banks during the financial crisis.
Meanwhile, the company’s revenue from trading equities jumped 39% in the first quarter from the previous year, likely due to the strong volatility of the markets in March. Its trading revenue likely continued to be boosted by volatile markets in the first half of April.
Further, Moynihan stated that many large businesses had drawn down their credit lines in Q1, while Bank of America had also increased the amount of loans it had made to other banks and smaller businesses. Overall, the bank’s commercial loans surged by a huge $67 billion year-over-year in March.
I think that the vast majority of these loans will be repaid because businesses will regain their footing as the economy reopens in May and June. Again, another key reason for my optimism on that front is the fact that most high-end earners have kept their jobs. But additionally, many lower income workers and small businesses will get their jobs and cash flows back as states reopen their economies.
And of course, as economies reopen, credit card spending will rebound.
Moreover, Moynihan reported that deposits at the bank’s Global Banking unit soared an incredible $84 billion YOY in Q1. Those deposits will not only make the bank more financially secure, but will give it more money that it can use to provide business loans and mortgages.
Finally, the bank will be boosted by fees that it will receive from the federal government for processing loans to small businesses in conjunction with the stimulus program.
The Bottom Line on BAC Stock
The bank is facing significant negative catalysts, but it also has strong positive drivers. I think its upbeat catalysts over the next six months will be almost as strong as the negative ones.
BAC stock has fallen 34% this year. At the end of 2020 and in mid-2021, I have little doubt that the stock price will be much higher than it is now. But over the next couple of months, I think that there will likely be some bumps in the road, for the U.S. and the bank, that will cause the shares to drop below their current levels.
Therefore, the best course of action would be buying BAC stock on weakness in May, June or July.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any shares of the aforementioned companies.
