A couple of weeks ago, Forbes contributor Henry To went out on a limb and turned bearish on U.S. bank stocks, which presumably includes an increasingly lovable Bank of America Corp (NYSE:BAC).
![BAC Stock: Is Bank of America Corp (BAC) Stock Running Into a Loan Headwind?](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
The call flew right in the face of conventional wisdom. BAC stock is up more than 84% since the middle of last year, and is still knocking on the door of new multiyear highs. And why not? President Donald Trump’s economic agenda is going to flood banks with all the lending business they could handle. To was needlessly playing the role of fearmonger, right?
Maybe, or maybe not. A closer look at the data — and other information — that prompted his concern suggests there may be something worth consideration whether you own BAC stock or any other major bank investment.
That’s What He Said
The short version of a long story: Henry To is alarmingly concerned about a sharp slowdown in lending growth on a year-over-year basis. Up around 8% between late 2014 and the end of 2016, it’s since fallen back (in a hurry) to less than 4% now. He got his data, and the chart that illustrates it, from the Federal Reserve.
It’s not just the pace of loan-growth that’s slowing either. The loans already on the books are increasingly going into default or delinquencies.
Though Q2’s final data from the Federal Reserve isn’t available yet, as the end of the first quarter, the nation’s delinquency rate on consumer loans had grown from 1.99% a year earlier to 2.18%. That’s still historically low, but all big trends start out as small ones.
Commercial and industrial loans aren’t faring much better.
Bank of America Isn’t Immune
And here’s the interesting part about the industry-wide data and the broader assumptions it prompts… it’s already starting to show up on Bank of America’s books, and elsewhere.
To be clear, the bigger a bank’s loan portfolio gets, the greater the number of charge-offs (for bad loans) you can expect to book. As an economy improves though, the portion of your loan portfolio that sours should become relatively smaller. That figure is getting bigger for BofA, however.
The graphic below tells the tale. Over the course of the past eight reported quarters, BofA’s loan loss provisions for its consumer banking division have grown from $523 million in Q3 of 2015 to $834 million as of the second quarter of this year. That’s enough to crank up the net charge-off ratio from 1.18% a year ago to 1.21% last quarter.
It’s not an earth-shattering shift, to be clear. In fact, there’s no direct connection between a bank’s charge-off rate and the sheer number of loans it’s making. It’s also worth noting that the loan-loss provisions Bank of America is adding to the books or outright booking now are only rising for its consumer banking arm; the metric is looking better in other arms.
Nevertheless, charge-offs and lending activity are linked to one another, even if only indirectly. To see so many data sets all collectively suggesting that lending is slowing down and the quality of those loans is deteriorating — at least on some fronts — does call into question some of the optimism that drove BAC stock and other bank stocks higher in the recent past.
Bottom Line for BAC Stock
One quarter doesn’t make a trend, to be sure. In fact, most wouldn’t deny that there has been a distinct pause in the economic engine between the point Trump was elected and now; he’s hit more than a few bumps in the road. Most of those investors don’t really care though, convinced he’ll get the economy over the hump soon enough. That should not only rekindle lending activity, but also make sick loans healthy again.
Still, that’s a big “if” hanging over Bank of America’s head here. Investors have essentially priced in perfection, and then some. If Q2’s initial GDP growth reading of 2.6% was just a fluke and we’re still technically in the doldrums, there’s a fair amount of downside risk from BAC stock.
It’s just not yet clear how this is all going to shake out, but it’s anything but a sure thing. You may want to keep this one under your microscope a little more than you normally might for other names.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.