Bank of America Could Rise on Improved Credit and Debit Card Outlook
JP Morgan Chase & Co. (NYSE:JPM) reported strong results last week, lifting expectations for other large cap banking stocks like Bank of America (NYSE:BAC), Citigroup (NYSE:C) and Goldman Sachs (NYSE:GS). Bank of America is expected to report improved earnings given the recovery in retail spending and an overall improved economic outlook. Bank of America maintains a strong presence in the U.S. market and currently boasts the largest banking franchise in the country, serving more than 59 million consumers and small businesses.
We have a price estimate of $16.12 for Bank of America’s stock, about 10% above the current market price.
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Bank of America’s Credit and Debit Cards
Performance of the banking sector is often a good indicator of macro economic health. The banking sector is currently benefiting from a pick-up in sales and trading due to a steepening yield curve, more M&A activity and a decline in loan losses from greater regulatory clarity.
Improvement in the macro economic outlook will lead to higher retail spending and greater outstanding credit card balances, a notable positive for Bank of America as the company has nearly 14% share of the U.S. debit card market and roughly 13% share of the U.S. credit card market. It is currently the largest debit and credit card issuer in the U.S.
Outstanding credit card balances for Bank of America’s clients declined from $132 billion in 2008 to an estimated $98 billion in 2010 due to reduced levels of retail spending as well as increased lending caution by banks after the CARD Act. We estimate that outstanding credit card balance for Bank of America’s clients will increase to about $148 billion by the end of our forecast period.
Bank of America’s credit and debit card business makes up about 14% of our estimated stock value for the company. The largest source of expense for this business comes from the provision for losses that the bank sets aside for potential bad loans. Recent regulatory changes have prompted a significant decline in loss provisions, meaning that banks will not need to set aside as high levels of reserves for potential losses and will have more capital available for other uses. This could improve the operating margins for credit and debit card business. We currently forecast negative operating margins for this segment through 2011, and improvement thereafter.
Drag the trend lines in the modifiable charts above to see how various scenarios for outstanding credit card balances and operating margin affect Bank of America’s stock value.
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