Bank of America CEO Brian Moynihan
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For a financial institution with nearly $3 trillion on its balance sheet, Bank of America sometimes gets lost in the shuffle.
It isn’t JPMorgan Chase (ticker: JPM), with its “fortress balance sheet” and charismatic CEO, Jamie Dimon. Nor is it Goldman Sachs Group (GS), with its long history and aura of invincibility. It isn’t even Citigroup (C) or Wells Fargo (WFC), which have excited investors with the possibility of turnarounds after a tough stretch. If anything, Bank of America (BAC) is kind of boring.
At least that’s what it wants you to think. But Bank of America, led by the unassuming Brian Moynihan, may be the best-positioned of the big U.S. banks to navigate both the current climate, in which capital markets reign supreme, and the accelerating postpandemic economic recovery. Even after a 35% gain this year, to a recent $41 a share, its stock still looks like a buy.
Nothing demonstrates this better than Bank of America’s earnings. The company reported a first-quarter profit of 86 cents a share, beating forecasts for 66 cents, due to the release of $2.7 billion of reserves it had taken in 2020 and its strong global-markets business, which saw a 20% jump in profit.
Wall Street focused, instead, on the Charlotte, N.C.–based bank’s higher compensation and Covid-19-related expenses during the quarter, as well as weak loan growth, something that has dogged the entire industry. But such a reaction isn’t unusual in Bank of America’s case. The stock has dropped an average of 3.6% on each of the days of the bank’s past five earnings releases. A month later, shares have been up an average of about 5%.
Increased trading and deal-making activity were a boon for Bank of America, and for all of the big banks last year. In the latest quarter, BofA saw earnings in its investment banking division grow 20% from the year-ago period. But while management at the major banks signaled that they expect activity to remain elevated, they also hinted in recent calls that some of the frenzy may be dying down. Look no further than the drying up of the market for special-purpose acquisition companies, or SPACs. Listings totaled 292 in the first three months of 2021, and just 10 in April.
To keep the recent rally in its shares going, Bank of America will have to look for other areas of growth—namely an increase in income and increased loan growth. Among the big banks, Bank of America and Wells Fargo are the most interest-rate-sensitive. If rates were to rise by 100 basis points, or one percentage point, Bank of America would see net interest income increase by $10.5 billion, according to the bank’s 10-K filing.
An improvement in net interest margins—the difference between what banks make on their loans versus the interest they pay on customer accounts—is largely out of Bank of America’s control. In a call with analysts in mid-April, Moynihan noted that net interest income, or NII, hit a trough in the third quarter of 2020 as the bank absorbed the impact of the sudden drop in interest rates that occurred in the first quarter.
Money Machines
As the economy rebounds and Bank of America’s earnings grow, the stock could close the valuation gap with rival JPMorgan Chase on the basis of price to tangible book value.
E=estimate. *P/TBV=price to tangible book value.
Sources: Bloomberg; company reports
But further improvements depend on a rise in longer-term Treasury yields, which have been stuck around 1.6% in recent weeks. Some economists and market strategists predict they’ll hit 2% later this year.
That means growth will have to come from loans, which is no sure thing. Loan growth will depend not only on economic growth but also on demand from consumers and businesses to borrow money. While economic growth seems all but assured, given the reopening and stimulus cash, demand might be a problem. “The projected economic growth should cause the need for companies to borrow, build inventory, increase hiring, and invest and do what they do in their businesses,” Moynihan said on the analyst call.
Loans and leases totaled $908 billion in the first quarter, down 8% from a year ago.
Together, higher rates and a growing loan base would have a big impact on earnings. “If the forward interest-rate curve materializes and we see modest loan growth in the later quarters of the year, we ought to see NII as we exit the fourth quarter of this year $1 billion a quarter higher,” Moynihan said on the call.
Moynihan wasn’t available for comment.
And if loan growth doesn’t pick up? Oppenheimer analyst Chris Kotowski said in a recent note that banks are still “profitable and cheap and that they will continue to use the excess capital they generate to buy back shares.” That could lift earnings per share.
Bank of America is expected to earn $3 a share this year, up 60% from 2020 results. The stock trades for 14 times projected earnings, or roughly 70% of the broader market multiple, which is 10 percentage points below its average discount from 2010 to 2019, Kotowski notes. “It reminds me a lot of the early 2000s,” he says. “Banks were doing fine but weren’t the new-economy stocks.”
Analysts are expecting continued growth. Those surveyed by FactSet project another 10-cent jump in per share profit in 2022. Net interest income is projected to be slightly lower this year, but increase by 5% from 2020 levels in 2022. In addition to improved earnings, investors could benefit from the $25 billion share-repurchase plan the board approved. Buybacks should resume fully after banks successfully complete the Federal Reserve’s stress tests in June.
Meanwhile, Bank of America trades at two times tangible book value, well ahead of the industry average of 1.1 times, but behind JPMorgan’s 2.3 times, according to FactSet. There’s reason to believe that BofA could close the gap with JPMorgan in the back half of this year, provided that economic conditions continue to improve. A 2.3 times tangible book, the stock would fetch $48, up 17% from Thursday’s close.
Write to Carleton English at [email protected]
