Can investors bank on Bank of America stock?
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Since recovering from the missteps that led to its nearly going under during the great recession back in 2008, Bank of America (NYSE:BAC) has been steadily making progress. Its stock, which was down to as low as $2.53 in 2009, has been gradually recovering, closing at a little over $40 on September 5. The bank has also been rewarding shareholders with steady dividend raises, declaring a dividend payout of $0.26 per share for the second quarter of 2024, up 8% from the previous quarter.
Billionaire investor Warren Buffett started opportunistically investing in BoA back in 2011, buying $5 billion of its preferred stock, at a point when the bank was still recovering from the hit it took during the financial crisis. Buffett also got warrants to buy 700 million BoA common shares at $7.14 per share, which he has exercised. With the stock up more than 400% from his purchase price, Buffett has soldmore than 150 million shares this year. Even then, he still holds a more than a 10% stake in the company and is its largest shareholder. What about other investors? Should you continue to bank on BoA stock?
Ripple effects from financial crisis
As readers may recall, the government had to spend billions of dollars in bailing out Bank of America(other banks that were brought down by the financial crisis also needed big bailouts). BoA’s 2008 acquisition of Countrywide Financial, implicated in making bad subprime mortgages and getting them off its books by selling them for securitization, and Merrill Lynch (which also made high-risk bets on mortgage securitizations) had weakened the bank’s standing. The acquisitions put BoA on the threshold of collapse as it found itself saddled with “assets” that deteriorated in value as the housing market collapsed.
Illustrating the saying that old sins have long shadows, BoA continues to grapple with the financial crisis fallouts, with UBS recently filing a case against the bank for $200 million to indemnify UBS for legal costs related to bad loans made by Countrywide that UBS securitized. This comes about even though the company had faced and settled multiple lawsuits in the 2010s, as a fallout of the financial crisis, for defrauding investors.
The bank, now based in Charlotte, N.C., traces its history back to the Bank of Italy, founded in 1904 by A.P. Giannini in California. The Italian immigrant started off making loans to lower-income consumers that other banks deemed less creditworthy. The bank survived the financial panic of 1907 and went on to establish multiple branches in California. The Bank of Italy merged with the Bank of America of California in 1930 to form the Bank of America National Trust and Savings Association. By 1949, the bank (also having survived the great depression) had more than 500 branches and this remains one of its strengths.
Improving financial performance
The company’s financials have been improving as it has slowly recovered from the hit it took during the financial crisis, and it continues to pass government stress tests. For the second quarter of 2024, ended June 30, the company reported total revenue of $25.4 billion, up from $25.2 billion for the 2023 second quarter. However, net income for the period was $6.9 billion, down from $7.4 billion for the corresponding 2023 quarter, while earnings per share dipped to $0.83, from $0.88.
On the company’s second quarter earnings call with analysts, CEO Brian Moynihan noted, “Attesting to the balance in our franchise, the earnings were split evenly, half in our consumer GWIM (global wealth and investment management) businesses, which serve people, and the other half in our institutional-focused business, global banking and markets. We grew revenue from the second-quarter 2023 as improvement in noninterest income overcame the decline in net interest income. Fees grew 6% year over year and represented 46% of total revenue in the quarter.”
The bank’s net interest income (the difference between the return it generates on its loans and investments and the interest it pays on deposits) was down $456 million to about $13.7 billion in the second quarter, with net interest yield (the return on assets) down .13% to 1.93%. BoA says the decline is due to higher deposit costs which was partly offset by “higher asset yields and higher net interest income related to global markets activity.” The bank expects its net interest yield to go up to closer to 2.3% as its net interest income goes up while its asset base remains steady.
Looking at the company’s business segments, its consumer banking segment saw revenue down 3% to $10.2 billion, mostly because of lower deposit balances (which the company attributes to a typical seasonal pattern of income tax payments by customers). The bank’s global banking segment also saw its revenue decline 6% to $6.1 billion, as net interest income and leasing revenue went down, which was partly offset by higher investment banking fees. Its global markets division saw revenue growth of 12% to $5.5 billion benefiting from higher sales and trading revenue, as well as investment banking fees. And its global wealth and investment management segment saw its revenue rise 6% to $5.6 billion, thanks to higher asset management fees (as financial markets rose), which was partly reduced by lower net interest income. Investment banking fees climbed 29% over the year, while sales and trading revenue rose 7%.
The company boosted its checking accounts by 278,000 during the quarter, making for more than 500,000 additions in the first half of the year. According to BoA CFO Alastair Borthwick, the company’s “excess deposit levels above loans” were at $850 billion, providing good value for shareholders. As the company’s longer-term and lower-yielding securities matured, it reinvested the money in higher-yielding assets. With the combined yield realized from the bank’s cash and securities improving, it is now 1.6% above the rate the company pays on its deposits.
Bank of America had to boost its provision for credit losses by $383 million to $1.5 billion, mostly because of its credit card portfolio (on which charge offs rose to 0.93%, from 0.64% in 2023) and commercial real estate office loans. Moynihan sees a plateauing in credit card delinquencies in the quarter which should lead to a stabilization in net credit card losses for the second half of the year.
Net charge offs for the quarter were at 0.59%, which Moynihan sees as a stabilization considering that it was that high only back in 2014 when the bank was still emerging from the financial crisis.
Interest rate risk
With the Federal Reserve poised to bring down its target rate from the current high 5.25% to 5.50% range, financial institutions are faced with the prospect of managing their interest rate risk.
BoA expects that its net interest income will rise from $13.9 billion for the second quarter to about $14.5 billion for the fourth quarter. This comes about as it expects interest income from its portfolio securities and consumer loans combined with the impact of recognition as income of a previous charge off related to the cessation of the Bloomberg Short-term Bank Yield Index (BSBY) and net interest income from global markets to add to its net interest income. This is based on a scenario of the Fed doing three interest rate cuts of 0.25% in September, November and December and against a backdrop of low single-digit growth in loans and deposits combined with a slowing of “deposit rotation.”
The bank expects that a growing base of loans and deposits combined with good fee-based income together with flat expenses will enable the company to more effectively offset its fixed costs.
According to BoA CFO Alastair Borthwith, “And the most important thing is we feel like 2024 is a really foundational year. It's this twist period where we just got to get through the last of the deposit rotation, and we're establishing a foundation for growth from here.”
Besides interest rate risk, BoA also faces risks from potential cyberattacks and competition, among other things. It uses derivatives to hedge its financial risk.
Cross referral strategy
At the end of the second quarter, BoA served about 69 million consumers and small businesses with about 3,800 retail financial centers and 15,000 Automated Teller Machines (ATMs), in addition to its digital platform. Besides the U.S., it operates in more than 35 countries internationally.
The bank employs a cross-referral strategy to grow its business. According to Moynihan, “We also invest across our lines of business to knit them together and gain market share in the local markets. It's a differentiated advantage for us, our banking leadership position across our businesses and our nationwide franchise.”
For instance, “We leverage our franchise by connecting business customers to our wealth management teams. Our teams across all our businesses have made four million referrals to other businesses in the first six months of this year.”
To draw customers, BoA also continues to invest in providing personal service by opening 50 financial centers in 2023 and renovating another 911. It has invested more than $3 billion in its bank branches since 2018 and expects to invest a similar amount in the coming years. It is looking to expand into Omaha, Louisville, Boise, Birmingham, Madison, New Orleans, Milwaukee, Dayton and Huntsville. BoA expects “This growth of our footprint will help us to better serve our clients, expand relationships and drive local community growth and development.”
On the consumer banking side, the bank caught the attention of the Consumer Financial Protection Bureau last year for allegedly setting up credit card accounts without customer knowledge, among other things. It seems the bank’s employees have been resorting to this practice since at least 2012 in order to meet sales targets. The consumer protection agency slapped a $150 million penalty on BoA and the bank was also held responsible for paying back $100 million to consumers harmed by its actions.
Is BoA a good bet?
At the end of 2023, the bank’s “liquidity coverage ratio” of 1.15% (indicating the liquidity available to cover its immediate liabilities) was down from 1.20% at the of 2022. The company’s earnings per share of $3.08 for 2023 makes for a price-to-earnings ratio of 12.98, while its forward-looking PE ratio is 12.44, compared to the banking industry average of 11.66.
In terms of profitability, BoA’s gross margin for the last twelve months of about 50% compares to the banking industry average of about 56%. And its book value per share was at about $34 at the end of the second quarter. The bank’s debt-to-equity ratio was at about 1 at the end of the second quarter, which means the bank hasn’t taken on more debt than it should.
In addition to paying steady dividends (providing a yield of more than 2%), the bank engages in stock repurchases ($4.6 billion for 2023) and had about $12.7 billion authorized for repurchases at the end of 2023. One negative note is that the company has been in the news for overworking its employees(although long hours aren’t unusual in the investment banking sector).
All things considered, it seems that while BoA has recovered from the financial crisis, it doesn’t show a lot of growth potential. That means while current shareholders could hold on to the stock, others should think twice before getting in.
P.S.Want me to look into a particular stock? Reach out to stocktakes1@gmail.com and I’ll consider your suggestion.
Note: I do not own any individual Bank of America stock and I do not intend to take a position in the stock within five days of publication of this article. This write up is my unbiased opinion and not intended as financial advice. All investments carry risks and you should talk to a financial advisor to learn about the suitability of an investment for your portfolio. I did not receive any compensation for this piece that influenced my views.