Is Bank of America Stock Fairly Priced?

BAC: Bank of America logo
Bank of America

Bank of America’s stock (NYSE: BAC) has lost 20% YTD as compared to the 17% drop in the S&P500 index over the same period. Further, at its current price of $37 per share, the stock is trading 12% below its fair value of $42 – Trefis’ estimate for Bank of America’s valuation

The bank topped the consensus estimates of revenues and earnings in the third quarter, with net revenues increasing by 8% y-o-y to $24.5 billion. It was mainly driven by a 24% growth in the net interest income (NII), which benefited from improvement in interest rates and higher outstanding loan balances. However, the growth was partially offset by an 8% drop in noninterest revenues. This suffered due to a decrease in investment banking income, asset management fees, and service charges, overpowering the growth in sales and trading revenues. On the expense front, the provisions for credit losses saw an unfavorable build-up from -$624 million to $898 million, leading to a 9% y-o-y reduction in the adjusted net income to $6.6 billion. 

The bank’s top line improved 5% y-o-y to $70.4 billion in the first nine months of FY 2022. It was primarily because of a 20% rise in the NII, partially offset by an 8% decline in the noninterest income. Notably, a big portion of this growth came from consumer banking and wealth management segments. All in all, the firm‘s adjusted net income decreased 20% y-o-y to $19.1 billion, despite the revenue growth, due to higher provisions for credit losses.

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Moving forward, the net interest income is expected to drive the bank’s top line in Q4. Altogether, Bank of America revenues are estimated to touch $95 billion in FY2022. Additionally, BAC’s adjusted net income margin is likely to remain around 28%, leading to an adjusted net income of $26.4 billion. This coupled with an annual EPS of $3.16 and a P/E multiple of just above 13x will lead to a valuation of $42.

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 Returns Nov 2022
MTD [1]
YTD [1]
Total [2]
 BAC Return 3% -20% 67%
 S&P 500 Return 2% -17% 77%
 Trefis Multi-Strategy Portfolio 2% -20% 215%

[1] Month-to-date and year-to-date as of 11/30/2022
[2] Cumulative total returns since the end of 2016

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