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Watch Bank of America (BAC) Despite Recession Risk in 2023
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Per a poll conducted by Reuters in early December 2022, economists are expecting “a short and shallow recession” in 2023, along with more interest rate hikes. At present, the benchmark interest rates are at a 15-year high range of 4.25-4.50%, and the Federal Reserve is projecting at least another 75 basis points (bps) hike, with the same peaking at 5.1% by the end of this year.
The year 2022 was a turbulent one for the U.S. markets, marked by “persistent” inflation and the central bank’s ultra-aggressive monetary policy, along with geopolitical and supply-chain headwinds. The S&P 500 Index clocked the worst performance since the 2008 financial crisis, with the Nasdaq and the Dow Jones trading in the bear market. Except for energy, all the 10 S&P 500 sectors ended in the red. Even the Financial Services sector, which usually benefits from higher rates, lost 10.6% last year.
Amid such a grim scenario, investors must look for stocks that are fundamentally well-placed and will continue to thrive once the current headwinds cool off. Today we are discussing one of the largest banks in the United States — Bank of America (BAC - Free Report) .
Banks are highly vulnerable to loan losses when an economic slowdown arises. But things are different this time. Even if the U.S. dips into “mild” recession, it would be unlike any in the past. While the central bank had come to Wall Street's rescue through monetary policy easing in the past, this time, it has no option but to aggressively raise interest rates.
As the rates rise, the banking industry benefits from the same. Among the large banks like Wells Fargo (WFC - Free Report) , JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) , Bank of America is the most interest rate sensitive. The company’s net interest income (NII) jumped 20% on year-over-year basis for the nine months ended Sep 30, 2022, supported by robust loan growth.
Management expects NII in the fourth quarter of 2022 to be at least $1.25 billion higher than the third-quarter level. Also, BAC projects an additional $4.2 billion rise in NII if there's a 100-bps parallel shift in the interest rate yield curve over the next 12 months. The Fed has already moved another 125 bps following the release of the company’s third-quarter results. Hence, the solid boost in the company’s NII will more than offset the increasing loan losses and help earnings growth even through the imminent recession.
Shares of this Zacks Rank #3 (Hold) company plunged 25.5% in 2022, which is more than the S&P 500’s decline of 20.7%. This provides an attractive entry point for investors in a quality franchise. The stock’s performance was also worse than Wells Fargo, JPMorgan and Citigroup, which lost 13.9%, 15.3% and 25.1%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price Performance in 2022
Image Source: Zacks Investment Research
Apart from above-mentioned tailwinds, Bank of America will continue to reap the benefits of its digitization initiatives. Digital transactions are substantially cheaper for banks than in-person interactions. BAC has grown the number of active digital users to approximately 43.5 million since 2019. As the customers shift toward digital banking, the company can capitalize on the same by consolidating its branch network (which is down almost 7% year over year as of Sep 30) and reduce non-interest expenses.
Prudent cost management has been supporting the bank’s financials too. Its expense-saving plan — Project New BAC (launched in 2011) — helped improve the overall efficiency. The bank has been incurring $15 billion (on average) in operating expenses on a quarterly basis despite undertaking several strategic growth efforts. For 2022, management anticipates expenses to be $61 billion, which includes the cost related to the resolution of regulatory and litigation matters. Excluding this, expenses are expected to be a little more than $60 billion compared with $59.7 billion incurred in 2021.
Bank of America has a steady capital deployment plan. Post the clearance of the 2022 stress test, BAC hiked the quarterly dividend by 5% to 22 cents per share. Prior to this, the company had announced a 17% hike to its quarterly dividend in July 2021. Based on last day’s closing price of $33.51, BAC’s dividend yield currently stands at 2.63%.
Further, in October 2021, the company's share repurchase plan of $25 billion was renewed (replacing the April 2021 authorization). As of Sep 30, 2022, $15.95 billion worth of shares were left to be repurchased. Given the strong balance sheet and earnings strength, the company will be able to sustain enhanced capital deployments.
Therefore, Bank of America stock seems well-placed to counter the impending recession in 2023. Additionally, at $33.51 per share, the stock is currently trading at a price/tangible book value of 1.60X, way below the Zacks Finance sector average of 4.55X. Thus, the attractive valuation might be a good entry point for investors.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Parting Views
Considering Bank of America’s growth prospects and robust fundamentals, investors must watch the stock for long-term gains. The company’s efforts to improve revenues, strong balance sheet and liquidity positions and expansion into new markets will keep supporting its financials.
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Watch Bank of America (BAC) Despite Recession Risk in 2023
Per a poll conducted by Reuters in early December 2022, economists are expecting “a short and shallow recession” in 2023, along with more interest rate hikes. At present, the benchmark interest rates are at a 15-year high range of 4.25-4.50%, and the Federal Reserve is projecting at least another 75 basis points (bps) hike, with the same peaking at 5.1% by the end of this year.
The year 2022 was a turbulent one for the U.S. markets, marked by “persistent” inflation and the central bank’s ultra-aggressive monetary policy, along with geopolitical and supply-chain headwinds. The S&P 500 Index clocked the worst performance since the 2008 financial crisis, with the Nasdaq and the Dow Jones trading in the bear market. Except for energy, all the 10 S&P 500 sectors ended in the red. Even the Financial Services sector, which usually benefits from higher rates, lost 10.6% last year.
Amid such a grim scenario, investors must look for stocks that are fundamentally well-placed and will continue to thrive once the current headwinds cool off. Today we are discussing one of the largest banks in the United States — Bank of America (BAC - Free Report) .
Banks are highly vulnerable to loan losses when an economic slowdown arises. But things are different this time. Even if the U.S. dips into “mild” recession, it would be unlike any in the past. While the central bank had come to Wall Street's rescue through monetary policy easing in the past, this time, it has no option but to aggressively raise interest rates.
As the rates rise, the banking industry benefits from the same. Among the large banks like Wells Fargo (WFC - Free Report) , JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) , Bank of America is the most interest rate sensitive. The company’s net interest income (NII) jumped 20% on year-over-year basis for the nine months ended Sep 30, 2022, supported by robust loan growth.
Management expects NII in the fourth quarter of 2022 to be at least $1.25 billion higher than the third-quarter level. Also, BAC projects an additional $4.2 billion rise in NII if there's a 100-bps parallel shift in the interest rate yield curve over the next 12 months. The Fed has already moved another 125 bps following the release of the company’s third-quarter results. Hence, the solid boost in the company’s NII will more than offset the increasing loan losses and help earnings growth even through the imminent recession.
Shares of this Zacks Rank #3 (Hold) company plunged 25.5% in 2022, which is more than the S&P 500’s decline of 20.7%. This provides an attractive entry point for investors in a quality franchise. The stock’s performance was also worse than Wells Fargo, JPMorgan and Citigroup, which lost 13.9%, 15.3% and 25.1%, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price Performance in 2022
Image Source: Zacks Investment Research
Apart from above-mentioned tailwinds, Bank of America will continue to reap the benefits of its digitization initiatives. Digital transactions are substantially cheaper for banks than in-person interactions. BAC has grown the number of active digital users to approximately 43.5 million since 2019. As the customers shift toward digital banking, the company can capitalize on the same by consolidating its branch network (which is down almost 7% year over year as of Sep 30) and reduce non-interest expenses.
Prudent cost management has been supporting the bank’s financials too. Its expense-saving plan — Project New BAC (launched in 2011) — helped improve the overall efficiency. The bank has been incurring $15 billion (on average) in operating expenses on a quarterly basis despite undertaking several strategic growth efforts. For 2022, management anticipates expenses to be $61 billion, which includes the cost related to the resolution of regulatory and litigation matters. Excluding this, expenses are expected to be a little more than $60 billion compared with $59.7 billion incurred in 2021.
Bank of America has a steady capital deployment plan. Post the clearance of the 2022 stress test, BAC hiked the quarterly dividend by 5% to 22 cents per share. Prior to this, the company had announced a 17% hike to its quarterly dividend in July 2021. Based on last day’s closing price of $33.51, BAC’s dividend yield currently stands at 2.63%.
Bank of America Corporation Dividend Yield (TTM)
Bank of America Corporation dividend-yield-ttm | Bank of America Corporation Quote
Further, in October 2021, the company's share repurchase plan of $25 billion was renewed (replacing the April 2021 authorization). As of Sep 30, 2022, $15.95 billion worth of shares were left to be repurchased. Given the strong balance sheet and earnings strength, the company will be able to sustain enhanced capital deployments.
Therefore, Bank of America stock seems well-placed to counter the impending recession in 2023. Additionally, at $33.51 per share, the stock is currently trading at a price/tangible book value of 1.60X, way below the Zacks Finance sector average of 4.55X. Thus, the attractive valuation might be a good entry point for investors.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
Parting Views
Considering Bank of America’s growth prospects and robust fundamentals, investors must watch the stock for long-term gains. The company’s efforts to improve revenues, strong balance sheet and liquidity positions and expansion into new markets will keep supporting its financials.