Bank of America’s stock (NYSE: BAC) has lost 21% YTD as compared to the 18% drop in the S&P500 index over the same period. The recent drop in the stock price was due to several factors – record-high inflation figures, investor fear of the economy moving into recession due to faster than expected interest rate hikes, and geopolitical tensions. That said, at its current price of $35 per share, the stock is trading 27% below its fair value of $48 – Trefis’ estimate for Bank of America’s valuation.
The bank recently released the first-quarter results, topping the consensus estimates of revenues and earnings. It posted total revenues of $23.23 billion – up 2% y-o-y. It was mainly driven by a 9% increase in the consumer banking segment, followed by a 10% rise in wealth management and a 12% growth in the corporate & commercial banking (global banking) divisions. The segments primarily benefit from improvement in the net interest income (NII) driven by higher deposit balance and a slight increase in the net interest margin. Notably, total NII grew 13% y-o-y to $11.6 billion. On the flip side, the positive growth in the above three segments was partially offset by a 15% drop in the global markets unit (sales & trading) due to lower FICC (fixed income, currency & commodity) trading revenues. Further, the provision for credit losses was $30 million in the quarter, as compared to -$1.9 billion in the prior-year period. Overall, it led to a 13% y-o-y decline in the adjusted net income to $6.6 billion.
The bank’s top line grew 4% y-o-y to $89.1 billion in 2021. It was primarily because of higher revenues in investment banking and wealth management divisions. Further, the sales & trading and consumer banking businesses also witnessed a slight improvement in revenues. That said, despite a modest 4% increase in the total revenues, the adjusted net income jumped 85% y-o-y to $30.6 billion, thanks to a favorable decrease in the provisions for credit losses from $11.3 billion to -$4.6 billion.
The Federal Reserve has already increased the benchmark interest rates twice this year, 0.25% in March and 0.50% in the first week of May, and we anticipate further positive revisions in the year. It will likely benefit the NII of the bank, which contributes close to 50% of the top line. That said, the market-driven revenues are likely to normalize, with a recovery in the economy. Altogether, the Bank of America’s revenues are expected to touch $94.24 billion in FY2022. Additionally, BAC’s adjusted net income margin is likely to stabilize at about 28% in 2022, leading to an adjusted net income of $26.8 billion. This coupled with an annual EPS of $3.33 and a P/E multiple of just below 15x will lead to the valuation of $48.
|S&P 500 Return||-5%||-18%||76%|
|Trefis Multi-Strategy Portfolio||-8%||-23%||206%|
 Month-to-date and year-to-date as of 5/13/2022
 Cumulative total returns since the end of 2016