[Updated 03/26/2021] Bank of America
Having gained 108% from the March 23 low of last year, at the current price close to $ 38 per share, we believe Bank of America Shares (NYSE: BAC) has some room for maneuver on the downside. Bank of America, a leading financial institution in the United States, saw its stock drop from $ 18 to $ 38 from the March 2020 low against the S&P 500 which gained nearly 75% – the share dominates the market as a whole by a considerable margin. and is trading 8% above its pre-Covid-19 peak in February 2020. The bank has outperformed the consensus earnings estimate in each of the past three quarters, which has shaped a positive outlook for investors towards action. While its revenue suffered in 2020 – down 6% year-on-year to $ 85.5 billion, its Global Markets segment grew 20% year-on-year on higher sales and trade. and income from investment banks. This somewhat offset the negative impact of an 11% drop in net interest income due to headwinds in interest rates. In addition, it reported a 96% decline in provisions for credit losses in its fourth quarter results on a sequential basis – from $ 1.4 billion to $ 53 million, and released approximately $ 828 million in reserve for loan losses. This means that the bank perceives an improvement in the risk of default.
Bank of America has a large loan portfolio – $ 886 billion in consumer, business and wealth management loans, according to 2020 figures. In addition, net interest income contributes about 50% of total income . Therefore, small changes in interest rates can have a big impact on its turnover. The bank suffered in 2020 due to a lower interest rate environment, which, although improved in recent months, is still below pre-Covid-19 levels and it is unlikely that he’s experiencing a full recovery anytime soon. In addition, the main support for BAC’s revenues in 2020 has been a significant rise in global markets, driven by higher trading volumes and growth in underwriting volume. However, as the economy improves, both higher trading volumes and trading volume are expected to normalize in subsequent quarters, which will hurt the segment of global markets. Overall, these two factors will limit Bank of America revenues to around $ 85.1 billion for fiscal 2021. On the flip side, with the expected massive availability of the Covid-19 vaccine and the economy recovering, the risk of default is expected to improve. This is likely to result in a favorable decrease in provisions for credit losses, thereby increasing the profitability of the bank. Additionally, BAC’s P / E multiple has dropped from around 9x in 2018 to almost 16x in 2020. While the company’s P / E is just below 20x now, that leaves some room for downside when the current P / E is compared to levels seen in recent years – P / E multiple of approximately 16x at the end of 2020. Our dashboard “What factors caused Bank of America stocks to change 53% from late 2018 to today?” provides the key figures of our thinking.
[Updated 12/30/2020] Despite interest rate headwinds, Bank of America stock remains a good investment
After gaining more than 60% from the low on March 23 of this year, at the current price of $ 30 per share, we believe Stock Bank of America (NYSE: BAC) has even more room for growth. Bank of America, one of the top five banks in the US, saw its stock drop from $ 18 to $ 30 from the recent low to the S&P which has traded around 65% – stock is slightly down lagging behind in wider markets and is still down 15% CUMULATIVE TO DATE. This could be attributed to lower than expected third quarter income and lower net interest income due to a lower interest rate environment – nine-month cumulative income of $ 65.4 billion. were 5% lower than net interest income. In addition, the allowance for credit losses increased to $ 11.3 billion for the nine months, compared to $ 2.6 billion for the same period of the previous year, mainly due to the risk higher default on outstanding loans.
Bank of America shares have partially reached where they were before February’s decline due to the coronavirus outbreak turning into a pandemic. Despite rising from March 23 lows, we believe the company’s stock still has potential as its historic P / E multiple means it still has some way to go.
The company’s revenue hovered around $ 91.2 billion in 2018-19, however, the net profit figure declined 3% during the same period. This is mainly explained by a slight decrease in the net profit margin from 30.8% in 2018 to 30.1% in 2019.
While the company experienced stagnant revenue growth over 2018-2019, its P / E multiple increased. We believe the stock should see some upside despite the recent rebound and potential weakness from a recession triggered by the Covid epidemic. Our dashboard “What factors caused Bank of America stocks to change 22% from late 2018 to today?” has the underlying numbers.
Bank of America’s P / E multiple fell from just over 9x in 2018 to around 13x in 2019. The company’s P / E suffered from declining Q2 and Q3 revenue and is just right below 11x now. This leaves some upside room for maneuver when the current P / E is compared to levels seen in recent years – a multiple of P / E of around 13x at the end of 2019.
So where is the action headed?
Bank of America is very sensitive to a drop in interest rates given the bank’s large deposit and loan portfolio. Therefore, the Federal Reserve’s zero rate policy in response to the Covid-19 crisis is likely to put pressure on the bank’s net interest income. Also, as the economy moves closer to normalcy, higher trading income due to a surge in market activity is expected to normalize in the coming months. Overall, Bank of America revenues are unlikely to see an immediate recovery in the short term. However, as the economic situation improves, the loan repayment capacity of businesses and retail customers is expected to recover, which will result in a favorable decrease in provisions for credit losses. In addition, the bank is expected to launch its share buyback program in 2021. These two factors are likely to have a positive impact on Bank of America‘profitability and profits, giving a boost to its action.
Actual recovery and its timing depend on wider containment of the spread of the coronavirus. Our dashboard Trends in Covid-19 cases in the United States provides insight into the spread of the pandemic in the United States and contrasts with trends in Brazil and Russia. Following the Fed’s stimulus – which set a floor on fear – the market was ready to “look through” the current period of weakness and take a longer-term view. With investors focusing their attention on the 2021 results, valuations become important in finding value. Although market sentiment may be volatile, and evidence of a rise in new cases could scare investors again.
While Stock Bank of America May have moved, 2020 has created many price discontinuities which may offer interesting trading opportunities. For example, you will be surprised at how the valuation of stocks for Amerco vs. Central Garden & Pet shows a disconnect with their relative operational growth. You can find a lot of them discontinuous pairs here.