BofA Is Well Positioned To Report Top-Line Growth In 2019 Even If There Are No More Rate Hikes

by Trefis Team
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Trefis
BAC
Bank of America
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Per Trefis estimates, Bank of America (NYSE: BAC) stock is worth $35, which is 20% higher than the current market price. Our price estimate is based on a P/E multiple of 11.8x and an EPS estimate of $2.97 for FY 2019. We have summarized our full-year expectations for Bank of America in our interactive dashboard How Did Bank of America Fare In Q1 2019, And What Can We Expect In 2019? You can modify any of our key drivers to gauge the impact of changes on its valuation. In addition, you will find more Trefis data for Financial Services companies here.

A Quick Look At Bank of America’s Revenue Sources

Bank of America reported $91.2 billion in Total Revenues in FY 2018. This included 5 revenue streams:

  • Consumer Banking: $37.5 billion in FY 2018 (41% of Total Revenues) – It consists of Deposits and Consumer Lending sub-segments and offers credit, banking and investment products and services to consumers and small businesses.
  • Wealth and Investment Management: $19.3 billion in FY 2018 (21% of Total Revenues) – It provides a variety of customized banking, investment and brokerage services to meet the needs of individuals and institutions. This consists of two primary businesses – Merrill Lynch Global Wealth Management (MLGWM) and Bank of America Private Bank.
  • Advisory & Underwriting Services: $5.5 billion in FY 2018 (6% of Total Revenues) – It offers Financial Advisory and Debt & Equity Underwriting services.
  • Corporate & Commercial Banking: $16.5 billion in FY 2018 (18% of Total Revenues) – It includes services like commercial loans, trade finance, asset based lending, and Capital Management & Treasury Solutions among others.
  • Sales & Trading: $13.7 billion in FY 2018 (15% of Total Revenues) – It offers sales and trading services to institutional clients across fixed-income, credit, currency, commodity and equity businesses.
  • All other: (-$1.3) billion in FY 2018 (-1% of Total Revenues) – This represents firm’s Global Principal Investments, Corporate Investments and Strategic Investments division.

Key Revenue Drivers for Bank of America

  • Business Loans Outstanding: It is the main driver of Corporate & Commercial Banking revenues. In Q1 2019, Corporate and Commercial Banking revenues grew by 3% y-o-y due to loan & deposit growth and higher interest rates, which is likely to continue in consequent quarters. Outstanding Business Loans have seen a steady increase over years (CAGR 2015-2018: 5%) and is expected to increase by 7% y-o-y in 2019.
  • Net Interest Yield as % of Total Consumer Loans: Q1 2019 recorded an overall improvement in Net Interest Yield by 9 bps y-o-y. Although the Fed is expected to hold interest rates constant for the rest of the year, this key metric won’t see the strong growth it has witnessed over recent years. However, an improvement in high-yield loans (especially credit cards) should help the Consumer Banking division report a 6 bps improvement in this figure for the year compared to the level last year.
  • Wealth Management Assets under Management (AuM): Bank of America’s Wealth Management AuM figure has seen steady growth over recent years (CAGR 2015-2018: 4%), and it is likely to follow similar growth in subsequent quarters. We expect it to grow by 18% y-o-y by the end of 2019, as the equity market slump hurt asset valuation at the end of 2018.

Bank of America’s Outlook For Full-Year 2019

  • Bank of America is expected to report $94.6 billion in Total Revenues for 2019, which is 4% more than the figure for 2018.
  • Consumer Banking revenues are expected to increase by 4% y-o-y followed by Corporate & Commercial Banking due to higher Net Interest Income. As we detailed above, the Net Interest Income will be driven by a strong growth in the bank’s loan base. This should more than make up for negligible gains to the Net Interest Margin figure as the Fed holds benchmark rates constant.
  • Wealth Management is expected to grow by 3% y-o-y driven by an 18% increase in Assets under Management (AUM) and 10% increase in Brokerage Assets & Deposits.
  • Gains to the top line will be partially offset by an expected 4% decline in Sales & Trading revenues.
  • Total Expenses would fell to $56.4 billion due to efficiency savings. Similarly, Net Income will increase by 7% y-o-y driven by higher EBT, partially offset by a higher effective tax rate.
  • Bank of America is expected to repurchases billions of dollars’ worth of shares over the year. This should help its EPS figure reach $2.97 for FY 2019.
  • EPS of $2.97 coupled with our forward P/E multiple of 11.8x represents a price estimate of $35 – representing a potential upside of 20% for the bank’s stock

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