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Bank of America (BAC) Lags Peers YTD: Will It Turnaround in 2024?
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Shares of Bank of America (BAC - Free Report) have gained only 2.2% so far this year, underperforming the industry’s rally of 10.1%. BAC’s performance also compares unfavorably with the Zacks Finance sector’s 14.9% rally over the same period.
Let us find out what led to BofA’s weaker performance.
Year 2023 started on a positive note on the back of the Federal Reserve’s monetary tightening policy to control ‘sticky’ inflation. However, the early March regional banking crisis, which led to the collapse of three large banks because of the deposit flight to higher-yielding investment options, was a wake-up call for banks.
Almost all banks, big or small, had to bear the brunt of the banking crisis at some level.
While banks generally perform well in a rising interest rate environment, the ultra-aggressive pace of rate hikes turned counterproductive for banks this year.
While higher rates did aid interest income growth to an extent, almost all banks faced pressure from rising deposit and funding costs, which hurt their margin growth.
Big banks, including JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) , weathered this turmoil better than their smaller regional peers.
However, despite being the most interest rate sensitive among its peers, the situation was worse for BAC because of its billions of dollars worth of long-dated Treasuries and mortgage bonds, which it had piled up at low rates during the pandemic.
As rates continuously increased, the interest that BAC had to pay on deposits surged while the interest that it received from the above-mentioned long-term securities was relatively lesser. This resulted in hundreds of billions of dollars of unrealized losses being accumulated on BAC’s balance sheet.
While BAC recorded improvements in its net interest income (NII) and margins on the back of higher rates like its peers, the magnitude of the rise was not much.
BAC’s NII increased only 13.8% year over year in the nine months ended Sep 30, 2023.
JPM’s NII rose 40% and C recorded 16% growth in the same time frame.
Year to Date Price Performance
Image Source: Zacks Investment Research
BofA’s performance was weaker than its peers this year. However, as we enter 2024 with the expectation of a few rate cuts, the operating backdrop is likely to become slightly better for the company.
The central bank has signaled interest rate cuts of 75 basis points in 2024. If this happens, the yield curve will start to come down, which will be a positive for BAC because its credit profile will improve.
While the demand for loans is expected to remain moderate next year, BAC should witness growth in its interest income as deposit costs fall.
Also, BofA has continuously been making efforts to align its banking centers according to customer needs. The bank is on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, BAC plans to expand its financial center network into nine new markets, while providing modern and state-of-the-art financial centers through its ongoing renovation and modernization project. Such efforts are expected to support BAC’s profitability to an extent next year.
In addition to the above-mentioned factors, BAC is expected to benefit from an improvement in the M&A scenario next year. Global deal volumes and value numbers were weak in 2023. However, with some green shoots visible in the investment banking (IB) business recently, an increase in M&As should positively impact BAC’s IB performance to some extent in 2024.
However, the volatile nature of the capital markets business, along with relatively higher mortgage rates, might make Bank of America’s fee income growth challenging. Moreover, elevated costs due to the company’s continued investments in technology and people across businesses will likely put pressure on its bottom line.
Hence, while concerns related to capital market volatility and elevated costs will continue to put pressure on BofA in the coming year, you should keep the Zacks Rank #3 (Hold) stock on your radar, given its efforts to expand into new markets, along with the benefits that the firm might get from falling rates.
Image: Bigstock
Bank of America (BAC) Lags Peers YTD: Will It Turnaround in 2024?
Shares of Bank of America (BAC - Free Report) have gained only 2.2% so far this year, underperforming the industry’s rally of 10.1%. BAC’s performance also compares unfavorably with the Zacks Finance sector’s 14.9% rally over the same period.
Let us find out what led to BofA’s weaker performance.
Year 2023 started on a positive note on the back of the Federal Reserve’s monetary tightening policy to control ‘sticky’ inflation. However, the early March regional banking crisis, which led to the collapse of three large banks because of the deposit flight to higher-yielding investment options, was a wake-up call for banks.
Almost all banks, big or small, had to bear the brunt of the banking crisis at some level.
While banks generally perform well in a rising interest rate environment, the ultra-aggressive pace of rate hikes turned counterproductive for banks this year.
While higher rates did aid interest income growth to an extent, almost all banks faced pressure from rising deposit and funding costs, which hurt their margin growth.
Big banks, including JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) , weathered this turmoil better than their smaller regional peers.
However, despite being the most interest rate sensitive among its peers, the situation was worse for BAC because of its billions of dollars worth of long-dated Treasuries and mortgage bonds, which it had piled up at low rates during the pandemic.
As rates continuously increased, the interest that BAC had to pay on deposits surged while the interest that it received from the above-mentioned long-term securities was relatively lesser. This resulted in hundreds of billions of dollars of unrealized losses being accumulated on BAC’s balance sheet.
While BAC recorded improvements in its net interest income (NII) and margins on the back of higher rates like its peers, the magnitude of the rise was not much.
BAC’s NII increased only 13.8% year over year in the nine months ended Sep 30, 2023.
JPM’s NII rose 40% and C recorded 16% growth in the same time frame.
Year to Date Price Performance
Image Source: Zacks Investment Research
BofA’s performance was weaker than its peers this year. However, as we enter 2024 with the expectation of a few rate cuts, the operating backdrop is likely to become slightly better for the company.
The central bank has signaled interest rate cuts of 75 basis points in 2024. If this happens, the yield curve will start to come down, which will be a positive for BAC because its credit profile will improve.
While the demand for loans is expected to remain moderate next year, BAC should witness growth in its interest income as deposit costs fall.
Also, BofA has continuously been making efforts to align its banking centers according to customer needs. The bank is on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, BAC plans to expand its financial center network into nine new markets, while providing modern and state-of-the-art financial centers through its ongoing renovation and modernization project. Such efforts are expected to support BAC’s profitability to an extent next year.
In addition to the above-mentioned factors, BAC is expected to benefit from an improvement in the M&A scenario next year. Global deal volumes and value numbers were weak in 2023. However, with some green shoots visible in the investment banking (IB) business recently, an increase in M&As should positively impact BAC’s IB performance to some extent in 2024.
However, the volatile nature of the capital markets business, along with relatively higher mortgage rates, might make Bank of America’s fee income growth challenging. Moreover, elevated costs due to the company’s continued investments in technology and people across businesses will likely put pressure on its bottom line.
Hence, while concerns related to capital market volatility and elevated costs will continue to put pressure on BofA in the coming year, you should keep the Zacks Rank #3 (Hold) stock on your radar, given its efforts to expand into new markets, along with the benefits that the firm might get from falling rates.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.