Could Bank of America Stock Tank To A Four-Year Low Of $14?

Bank of America’s stock is down 38% so far this year to its current level of $22, but it is possible that it hasn’t bottomed out yet. Why is that? Well, Bank of America’s (NYSE: BAC) revenues would face a significant challenge due to lower commercial and consumer spending, which coupled with the higher risk of loan defaults, could eat into earnings for the year. Our downside scenario dashboard How Low Can Bank of America Stock Go provides the key numbers behind our thinking for the drop, and we explain more below.

The point is, a significant contributor to the strong growth in Bank of American’s stock in the last two years was the bank’s strong earnings per share. In contrast, Bank of America’s P/E ratio, on a trailing basis, fell from about 17.3x at the end of 2017 to around 12.6x at the end of 2019. The P/E multiple is down to about 7.8x now, which is roughly 37% lower than the P/E figure at the end of 2019. And a sharper-than-expected reduction in earnings could take the multiple lower – making $14 a real possibility for Bank of America’s stock under our downside scenario. Do note that this scenario highlights just one possible path Bank of America’s stock could take in the near future if market conditions deteriorate more than what we forecast under our base case estimate for Bank of America’s stock.

So what’s the likely trigger and timing to this downside?

Bank of America has a sizable loan portfolio of around $301 billion in consumer loans and $374 billion in commercial loans (at the end of 2019). Further, the consumer and commercial banking segments together generated around 61% of the bank revenues in 2019, which implies that the bank is heavily dependent on the two segments. Additionally, we expect that businesses could suffer losses due to the combined effect of lower consumer demand, supply chain disruption, and global economic slowdown. This could impact the loan repayment capacity of both commercial and consumer banking customers – exposing the bank to the possibility of sizable losses. Further, as the economic condition deteriorates, it would become expensive for the bank to attract funding, negatively impacting all its operations. Similarly, the lower asset valuations would mean a drop in Assets under Management– resulting in a decline in wealth management revenues.

However, due to the high level of volatility in equity & debt markets over recent weeks, Bank of America is well-positioned to report strong results for its securities trading arm, which should help mitigate the negative impact of weak economic conditions on its other operating segments. But the company generated only around 14% of its revenues from its sales & trading business in 2019, so there will be a material decline in the top line over subsequent quarters.

While recently released Q1 results saw a slight decline in revenues, we believe that Q2 results in July will further confirm the hit. It is also likely to accompany a lower Q3 as-well-as full-year 2020 guidance. Specifically, we believe the full-year revenue expectations formed by the market at the time of July’s Q2 results may be closer to $77.6 billion – 11% lower than its 2017 revenue of $87.4 billion and a good 15% lower than the 2019 revenue of $91.2 billion. A separate interactive dashboard shows key components of Bank of America’s revenues (Base case scenario).

The market isn’t going to stomach this well, and Bank of America’s P/E is likely to remain around the current level of 7.8x, which is about 38% lower than the 2019 P/E of 12.6x and at the lowest level in the last four years. Further, margins are expected to drop by 25%, which would mean a 34% drop in earnings, translating into Bank of America’s price drop of roughly 40%, to about $14 or lower.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio. The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of Bank of America’s multinational peers. The complete set of coronavirus impact and timing analyses is available here.

Overall, we believe Bank of America’s stock price at levels of $27 (Trefis price estimate) and below provide a buying opportunity for investors willing to be patient. But if our downside scenario comes true, Bank of America might actually end up doing better than its peers JPMorgan and Citigroup as we highlight in separate dashboards.

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