Bank of America’s stock (NYSE: BAC) is down 13% YTD as compared to the 17% rise in the S&P500 index over the same period. Further, at its current price of $29 per share, it is trading 19% below its fair value of $35 – Trefis’ estimate for Bank of America’s valuation.
Interestingly, Bank of America stock had a Sharpe Ratio of 0.2 since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
The bank surpassed the street expectations in the second quarter of 2023, with total revenues increasing 11% y-o-y to $25.2 billion. It was because of a 14% improvement in the net interest income (NII) due to higher interest rates and loan growth, and an 8% growth in the noninterest income. In terms of business segments, consumer banking revenues rose by 15%, followed by a 29% rise in global banking, and an 8% increase in the global markets division. That said, it was partially offset by a 4% drop in the global wealth and investment management unit. On the cost front, the provisions for expenses increased from $523 million to $1.12 billion. However, total noninterest expenses as a % of revenues witnessed a favorable decrease in the quarter. Overall, the adjusted net income increased 20% y-o-y to $7.1 billion.
The bank’s top line grew 12% y-o-y to $51.46 billion in the first half of FY 2023. It was driven by a 19% growth in the net interest income (NII), followed by a 4% rise in the noninterest revenues. While the NII benefited from higher interest rates and loan growth, the noninterest revenues were primarily up due to growth in FICC (fixed income, currency, & commodity) trading income. On the expense side, the provisions figure jumped from $553 million to $2.06 billion. However, it was overshadowed by a positive growth in the top line and a drop in noninterest expenses as a % of revenues. Altogether, it led to an 18% y-o-y improvement in the adjusted net income to $14.76 billion.
Moving forward, we expect the same trend to continue in Q3. All in all, the Bank of America revenues are estimated to touch $101.43 billion in FY2023. Additionally, BAC’s adjusted net income margin is likely to see a slight decrease in the year, leading to an adjusted net income of $26.8 billion. This coupled with an annual GAAP EPS of $3.38 and a P/E multiple of just above 10x will lead to a valuation of $35.
|S&P 500 Return||0%||17%||101%|
|Trefis Reinforced Value Portfolio||-1%||30%||569%|
 Month-to-date and year-to-date as of 9/6/2023
 Cumulative total returns since the end of 2016