Bank of America Stock Is Fairly Priced
[Updated 05/20/2021] Bank of America Valuation Update
Bank of America stock (NYSE: BAC) has gained more than 125% since the March 23 lows of last year and at its current price of $42 per share, it is at the same level as its fair value of $42 – Trefis’ estimate for Bank of America’s valuation. Further, the U.S. bank stocks have enjoyed a strong rally in 2021 – as evident from the benchmark Dow Jones U.S. Banks Index (up 33% YTD), due to the approval of stimulus packages, accelerated Covid-19 vaccination drives, and the Fed’s decision to maintain near-zero rates. The 38% YTD growth in Bank of America’s stock is in line with this trend.
Bank of America recently released its first-quarter FY2021 results, with the bank outperforming the consensus estimates for revenues and earnings. It reported total revenues of $22.8 billion, which is marginally higher than the year-ago period. This could be attributed to a 10% rise in sales & trading and a 62% jump in investment banking revenues – equity underwriting revenue increased from $283 million to $900 million in the quarter driven by higher equity issuance deals. However, this growth was partially offset by a 12% drop in the consumer banking division, which contributes close to 40% of the total revenues. Notably, the bank’s net interest income for the quarter decreased by 16% y-o-y due to lower interest rates. The bank’s adjusted net income of $7.6 billion increased 113% on a year-on-year basis, mainly due to a significant drop in provisions for credit losses – BAC released $2.7 billion in reserves for loan losses in the quarter.
The company reported $85.5 billion in revenues for the full year 2020, which is 6% below the 2019 figure. While its sales & trading and investment banking businesses reported strong growth in the year driven by higher trading volumes and higher underwriting deal volumes, the positive effect was more than offset by a drop in consumer banking, global banking, and wealth & investment management divisions. The decline was mainly due to lower net interest income (NII) – down 11% y-o-y, driven by the lower interest rate environment, and a decrease in new loan issuance. That said, we expect the outstanding loan balances to see some improvement in FY2021 due to a recovery in consumer spending levels. However, the low-interest rates are there to stay for some more time. Further, the wealth management Assets under Management (AuM) are likely to continue their growth trajectory in FY2021 as well – AuM increased 10% y-o-y to $1.4 trillion by the end of December 2020 and 4% sequentially to $1.47 trillion by the end of first-quarter 2021. Notably, the higher trading volumes and underwriting deal volumes are likely to continue for some more months before normalizing with recovery in the economy. Overall, the above factors will likely enable Bank of America’s revenues to touch $88.7 billion in FY2021. Additionally, the bank’s profitability figures suffered in 2020, due to a significant buildup in provisions for credit losses from $3.6 billion to $11.3 billion. However, the figure has reduced over the recent quarters, signaling some improvement in the loan default risk of its customers. Further, we expect the provisions to see a favorable decrease over the subsequent quarters, with improvement in the economic conditions. This will likely result in an EPS of $2.82, which coupled with a P/E multiple of just below 15x, will lead to the valuation of $42.
[Updated 01/27/2021] Bank of America Stock Is Unlikely To Yield Strong Returns
Despite a more than 70% gain since the March 23 lows of the last year, Bank of America stock (NYSE: BAC) is still trading 11% below its pre-Covid peak in February 2020. Trefis estimates Bank of America’s valuation to be around $33 per share – around 5% above the current market price. Bank of America is one of the two largest U.S. banks by total assets and holds a sizable portfolio of outstanding loans – $315 billion in consumer banking and $382 billion in business banking loans as per 2020 figures. This makes it very sensitive to changes in interest rates. The same was felt in its recently released fourth-quarter results, where the bank missed the consensus revenue estimates, while the earnings outperformed the expectations. The bank reported total revenues of $20.1 billion –10% lower than the year-ago period. The Global Markets segment grew by 14% y-o-y due to a jump in sales & trading revenues and investment banking fees. However, this growth was more than offset by a 13% drop in consumer banking and a 5% decline in the global wealth & investment management segment. Notably, the bank’s net interest income for the quarter decreased by 16% y-o-y due to lower interest rates.
Bank of America reported revenues of $85.5 billion for the full year 2020 – down 6% y-o-y. The bank generates close to 50% of its total revenues from net interest income, which suffered in 2020 due to interest rate headwinds – net interest income dropped by 11% y-o-y. However, it was partially offset by the positive growth in the Global Markets segment (up 20% y-o-y) driven by higher sales & trading and investment banking revenues. We expect the core banking revenues to continue to suffer in FY 2021, due to the lower interest rates driven by the zero-rate policy by the Federal Reserve in response to the Covid-19 crisis. In addition, the Global Markets revenues are expected to normalize in the coming months. This is likely to restrict Bank of America’s revenues to around $85.1 billion in FY 2021 – marginally lower than the 2020 figure.
The bank reported a 37% y-o-y drop in its net income figure for 2020, primarily due to higher provisions for credit losses. This led to an EPS of $1.87 – down 32% as compared to the 2019 figure. The Covid-19 crisis and economic slowdown negatively impacted the loan repayment capability of businesses and individuals, leading to a build-up in provisions for credit losses by the bank. However, it released some of its credit loss reserves in fourth-quarter 2020, in response to some recovery in consumer spending and loan demand by commercial customers – signaling an improvement in their financial condition. We expect the same trend to continue in the subsequent quarters and increase the bank’s EPS figure to $2.40 in FY2021. Additionally, the bank is likely to start its share repurchase program from the first quarter of 2021. Overall, the EPS of $2.40 coupled with the P/E multiple of just below 14x will lead to a valuation of around $33.
[Updated 11/13/2020] Down 25% YTD, Bank of America Stock Is Pressured By Low Interest Rates
Although Bank of America stock (NYSE: BAC) has gained around 50% since the March bottom, it is still down 26% YTD. Trefis estimates Bank of America’s valuation to be around $29 per share – around 10% above the current market price. The banking giant is one of the largest U.S banks in terms of total assets and is very sensitive to changes in interest rates. In its recently released third-quarter results, Bank of America reported total revenues of $20.34 billion, which underperformed the revenue consensus estimates and is 11% lower than the year-ago period. While the Global Markets segment grew by 11% y-o-y due to a jump in sales & trading revenues and investment banking fees, this growth was more than offset by a 17% drop in consumer banking and a 7% decline in the global wealth & investment management segment driven by lower interest income. The lending industry has been under pressure after the announcement of a zero-rate policy by the Federal Reserve in response to the Covid-19 crisis. It reduces the net interest margin that banks earn by taking in deposits and offering loans.
We expect the Bank of America’s revenues to slightly improve in the coming months, mainly driven by higher consumer spending. It is likely to report $86.7 billion in revenue for FY 2020 – 5% below the year-ago figure. Further, its net income margin is likely to suffer due to significant build-up in provisions for credit losses, reducing the EPS figure to $1.66 for FY 2020. Thereafter, revenues are expected to decline to $85.8 billion in FY2021, mainly driven by a drop in investment banking and sales & trading business. However, the EPS figure is likely to improve to $2.16 due to a favorable decrease in provisions for credit losses. This coupled with the P/E multiple of just above 13x will lead to a valuation of around $29.
[Updated 07/28/2020] Is Bank of America Stock Attractive?
Bank of America stock (NYSE: BAC) lost more than 49% – dropping from $36 at the end of 2019 to around $18 in late March – then spiked 34% to around $24 now. This implies it’s still 32% lower than the start of the year.
There were two clear reasons for this: The Covid-19 outbreak and economic slowdown meant that market expectations for 2020 and the near-term consumer demand plunged. This could negatively affect businesses and individuals, impacting their loan repayment capability and exposing Bank of America to sizable loan losses. The multi-billion-dollar Fed stimulus provided a floor, and the stock recovery owes much to that.
But we believe there is more upside to come over the coming months
Trefis estimates Bank of America’s valuation to be around $29 per share – about 20% above the current market price – based on an upcoming trigger explained below and one risk factor.
The trigger is an improved trajectory for Bank of America’s revenues over the second half of the year. We expect the company to report $86.4 billion in revenues for 2020 – around 5% lower than the figure for 2019. Our forecast stems from our belief that the economy is likely to open up in Q3. Further, the easing of lockdown restrictions in most of the world is likely to help consumer demand, benefiting the overall business scenario. The bank’s Sales & Trading operations have driven positive revenue growth in Q1 and Q2 due to higher trading volumes – increased 31% in the first half of 2020 as compared to the year-ago period. On similar lines, investment banking business saw significant growth in Q2 due to a jump in underwriting deals after the Fed stimulus. This has partially offset the impact of weak revenues in other segments. While we expect the trading income to drop in the subsequent quarters, it is likely to be still higher than the year-ago period. Overall, we see the company reporting an EPS in the range of $1.72 for FY2020.
Thereafter, Bank of America’s revenues are expected to further fall to $86 billion in FY2021, mainly due to a decline in sales & trading revenues. Further, the net income margin is likely to improve as compared to the previous year due to a decline in provisions for credit losses, leading to an EPS of $2.43 for FY2021.
Finally, how much should the market pay per dollar of Bank of America’s earnings? Well, to earn close to $2.43 per year from a bank, you’d have to deposit about $265 in a savings account today, so about 110x the desired earnings. At Bank of America’s current share price of roughly $24, we are talking about a P/E multiple of just below 10x. And we think a figure closer to 12x will be appropriate.
That said, banking is a risky business right now. Growth looks less promising, and near-term prospects are less than rosy. What’s behind that?
Bank of America has a huge portfolio of consumer, commercial, and wealth management loans – more than $840 billion in FY 2019. The economic downturn could deteriorate the loan repayment capability of its consumers, exposing the bank to significant loan defaults. In anticipation of this risk, Bank of America has increased its provisions for loan losses from around $1.9 billion in the first half of 2019 to $9.9 billion so far – a 5x jump. If the economic condition worsens, this figure could further increase in the subsequent months. Further, a negative economic outlook will make it expensive for the bank to attract funding, increasing the cost of its operations.
The same trend is visible across Bank of America’s peer – Citigroup. Its revenues are expected to benefit from positive growth in its trading arm and investment banking business in FY2020. However, its margins are likely to suffer due to a build-up in provisions for credit losses in anticipation of bad loans. This would explain why Citigroup’s stock currently has a price of over $52 but looks slated for an EPS of around $6.13 in FY2021 (for a P/E multiple of nearly 10x).
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