VALUATION HIGHLIGHTS

1. Corporate & Commercial Banking constitutes 35% of the Trefis price estimate for Bank of America's stock.
2. Consumer Banking constitutes 33% of the Trefis price estimate for Bank of America's stock.
3. Sales & Trading constitutes 13% of the Trefis price estimate for Bank of America's stock.

WHAT HAS CHANGED?

Latest Earning

In Q4 2023, Bank of America reported Total Revenues of $21.96 billion, which is 10% less than the year-ago period. The Net interest income (NII) decreased 5% y-o-y to $13.9 billion.

Impact of coronavirus outbreak

Businesses suffered heavy losses in 2020, which shifted their focus from long-term to near-term survivability. On the same lines, there was a drop in consumer demand as people refrained from discretionary expenditures. The economic downturn negatively impacted the loan repayment capability of businesses and individuals. This could have resulted in sizable losses for the bank, as it has a substantial loan portfolio of both consumer and commercial loans. Hence, Bank of America significantly increased its provisions for credit losses to cater to that risk. Further, Bank of America is heavily dependent on net interest income, which has suffered due to the lower interest rate environment. On the other hand, Bank of America generated positive growth in Sales & Trading and investment banking businesses, due to higher trading activity in the market and a jump in underwriting deals volume. The Bank reported Q2, Q3, and Q4 2020 results on similar lines, leading to a 6% y-o-y drop in its full-year 2020 revenues. The total revenues were $89.1 billion in FY2021 and $94.95 billion in FY2022. It further increased to $98.6 billion in 2023.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Bank of America's value that present opportunities for upside or downside to the current Trefis price estimate for Bank of America:

Sales & Trading

• Yield on FICC Trading Assets: Bank of America's trading yield has been around 5-6% over recent years. While we estimate yield figures to be between 4-5% going forward, if the division sees a worse-than-expected performance in the coming years, the yield could decrease to 3% over the Trefis forecast period. If that were to occur, there would be a downside of 2% to the Trefis price estimate.
• Investment Banking EBT Margin: Bank of America's investment banking business reported margins of around 36% in 2023. We expect the margin figure to gradually increase going forward. However, if these margins fall to 30% over our forecast period, then there would be a downside of about 2% to the current price estimate.

Wealth Management

• Wealth Management EBT Margin: Bank of America's wealth management business is critical to its overall business model, as it leverages the bank's strong retail banking presence to cross-sell additional services to existing customers. The wealth management division reported a steady improvement in margins from around 16% in the wake of the downturn to around 25% in 2023. While we expect the segment's operating margin to gradually increase going forward, a decline in this figure from increasing competition could push the figure to 20% by the end of our forecast period. This would result in a 4% downside to the Trefis forecast price.

BUSINESS SUMMARY

Bank of America is one of the leading financial institutions in the U.S. and, along with JPMorgan Chase, is one of the two largest U.S. banks by total assets. Through its operations in the U.S. and certain international markets, the firm offers a range of products and services such as credit and debit cards, mortgages, auto loans, commercial loans, investment banking, wealth management, and sales and trading.Bank of America's clients range from individual consumers to multinational corporations, financial companies, and governments. The firm makes a significant portion of its revenue from lending activities from which it earns a net interest spread. The bank also generates non-interest revenues such as investment banking advisory fees, asset management fees, and yields on trading assets.

SOURCES OF VALUE

Corporate and Commercial Banking is the most valuable division for Bank of America for the following reasons:

High-Interest Yields in Corporate and Commercial Banking

In 2023, Bank of America's Corporate and Commercial Banking division had over $379 billion in outstanding business loans and close to $506 billion in interest-earning treasury-client assets. We expect these figures to cross $460 billion and $660 billion respectively over our forecast period. Further, we expect that Bank of America will earn a net interest yield of roughly 2.4% on these assets.In comparison, Bank of America's Wealth and Investment Management division had $3.57 trillion in client assets at the end of 2023, but was earning a fee representing just about 0.40% of these assets. Bank of America also had about $220 billion in private banking loans, which earned an average net interest yield of almost 3.25%. The higher interest revenues for the Corporate and Commercial Banking division is why it is more valuable to the bank than Wealth Management.

Higher Margins in Corporate and Commercial Banking due to Minimal Loss Allowances

Bank of America's provisions within the credit card business decreased from 3% in 2018 to around 1.62% in 2023. We expect margins to gradually improve in both businesses.In comparison, Bank of America's margins within the Corporate and Commercial Banking division has fared much better. It was around 57% in 2023. We expect margins within Corporate and Commercial Banking to remain much higher than those within the credit card and mortgage businesses.

KEY TRENDS

We believe certain key trends will play out in the banking industry going forward:

Consolidation expected to continue

As a result of the financial crisis, the banking industry saw a period of mergers and consolidation. The financial crisis has seen nearly 15-20% of the market share change hands. The banking industry continues to see consolidation in almost every aspect of the business as players try and globalize and seek scale. Customers are also increasingly becoming more risk-averse and turning to larger players with stronger deposit bases due to uncertainty.

Acquisitions have helped increase Bank of America's market share in key areas

The acquisitions of Countrywide, Merrill Lynch, and LaSalle have increased Bank of America's Mortgage, Investment, and Retail banking businesses. The addition of Merrill Lynch has resulted in the combination of Bank of America's Premier Banking & Investments business to form Merrill Lynch Global Wealth Management. This addition has helped increase the number of financial advisers, assets under management, and client brokerage assets.