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BAC Stock Near 2-Year High Post Q2 Earnings: Too Late to Invest?
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One of the biggest American lenders, Bank of America (BAC - Free Report) , released its second-quarter 2024 results earlier this week. Since then, the stock has gained 2.7% to $43.01 and is trading near its two-year high of $44.44. Even before the release of its quarterly numbers, the stock performed exceedingly well. It was among the top five banks that outperformed the S&P 500 Index in the first half of 2024.
This year, Bank of America has gained 28.5% compared with the S&P 500 Index’s growth of 16.2%. In 2023, the stock rose just 1.6%.
The surge in BAC stock has left many investors contemplating whether they've missed an investment opportunity or still have time to take a position.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest continued strong performance for BAC. The stock trades above its 50-day and 200-day moving averages, signaling robust upward momentum and price stability. This technical strength underscores positive market sentiment and confidence in the company's financial health and prospects.
50-Day & 200-day Moving Average
Image Source: Zacks Investment Research
Factors Favoring the BAC Stock
Rate Cut Expectations: The Federal Reserve chairman, Jerome Powell, has signaled that the central bank is inching closer to cutting interest rates and cited recent inflation readings and the cooling job market as the primary reasons. Now, interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in net interest income (NII), they have driven up funding and deposit costs, thus squeezing banks’ margins.
For Bank of America, which is highly sensitive to interest rates, lower interest rates will be a boon and support net interest margin (NIM) expansion. The company’s NIM performance has been subdued for the last several quarters. Management thinks that in terms of its second-quarter NIM of 1.93%, it is under-earning. The metric is “going to go up over time. It'll go up as net interest income goes up,” with the normal figure being 2.3%.
Diversified Revenues: In the second quarter, like its peers – JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) – the company leaned on solid Wall Street performance while the Main Street business faltered. BAC posted a double-digit rise in investment banking (IB) fees (in the Global Banking division). The company had a solid start to 2024, which left it in a good position, “with top three rankings now in North America, Latin America, and EMEA, and number six in APAC.” The company plans to leverage its scale and size and drive growth in the IB business. The capital markets business is expected to be the major factor contributing to the company’s top-line growth.
During the conference call following the earnings release, the company’s chief financial officer, Alistair Borthwick, stated that NII has bottomed out in the current rate cycle and “will begin to rise in Q3 compared to Q2 and then rise again in Q4.” In the second quarter, the metric declined 3% from the prior year as higher deposit costs weighed heavily on it.
Borthwick added that NII will likely be approximately $14.5 billion for the fourth quarter, an increase of more than 4% from the second-quarter 2024 level. This is based on expectations of three rate cuts (September, November and December), a low single-digit growth in loans and deposits asset repricing and a slowdown in deposit rotation. Also, the incremental swap roll-off in the second half of 2025 should support NII.
Technology: Digital solutions are the need of the hour, and Bank of America continues to deliver innovative digital solutions, particularly through its digital banking capabilities. This helps it attract and retain customers and boost cross-selling opportunities The consumer mobile banking app now serves more than 47 million active users, and roughly 23 million consumers use Zelle, which has become a dominant way to move money. In the wealth management division, almost 87% of its global banking clients are digitally active, and the company’s CashPro platform uses AI to streamline service requests. BAC plans to continue strengthening its technology initiatives and spend heavily on these.
Branch Opening: Bank of America has embarked on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets. Similarly, earlier this year, JPMorgan announced plans to open more than 500 new branches and renovate 1,700 existing ones by 2027.
Bank of America also remains committed to providing modern and technologically advanced financial centers through its ongoing renovation and modernization project. Over the past three years, it has been renovating and upgrading its existing financial centers across the country, with more than 2,500 centers renovated. This created offices and meeting spaces for clients to engage with financial specialists and ensured a consistent and modern experience across all centers. These initiatives, along with the success of Zelle, will enable the company to improve digital offerings and cross-sell several products and services.
Fortress Balance Sheet: Bank of America’s liquidity profile remains solid. As of Jun 30, 2024, average global liquidity sources were $909 billion. Also, the company’s investment-grade long-term credit ratings of A1, A- and AA- from Moody’s, S&P Global Ratings and Fitch Ratings, respectively, and a stable outlook allow easy access to the debt market.
Analyst Sentiments Improve
Following the release of quarterly numbers, analysts seem to be bullish about Bank of America’s prospects. Over the past seven days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
This upward adjustment, though small, reflects a positive sentiment among analysts and suggests encouraging prospects.
Estimate Revision Trend
Image Source: Zacks Investment Research
Is a Higher Valuation Sustainable?
The company is currently trading at a forward 12-month P/E multiple of 12.62X, above the industry average of 11.85X. The stock trades at a premium to its peer Citigroup’s current forward 12-month P/E of 9.88X.
Investors could face downside risks if the company's future performance does not meet expectations. The banking industry is still on shaky grounds. A tough landscape marked by economic slowdown, increased regulatory scrutiny, higher rising delinquency rates, concerns related to commercial real estate loans and persistent inflation woes could hinder BAC’s growth trajectory.
Price-to-Earnings (forward 12 Months)
Image Source: Zacks Investment Research
How to Play the Bank of America Stock?
While Bank of America has achieved milestones with its recent stock performance reaching new highs, caution is warranted for prospective investors. The company's global presence, diversified revenues, branch openings and technological innovations to attract and retain customers provide a solid base for organic growth.
BAC also continues to reward shareholders handsomely. As it cleared the 2024 stress test, the company announced its intention to increase its quarterly dividend by 8% to 26 cents per share, beginning in the third quarter of 2024. In the last five years, it increased dividends four times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio sits at 29% of earnings.
However, challenges like high interest rates, subdued loan demand because of the economic downturn, higher regulatory capital requirements as part of the Basel 3 end-game and uncertain macroeconomic backdrop cannot be ignored.
Also, BAC's premium valuation relative to industry peers raises concerns about sustainability, especially amid economic uncertainties and other challenges. Investors should consider these factors carefully and evaluate their risk tolerance before buying this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term.
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BAC Stock Near 2-Year High Post Q2 Earnings: Too Late to Invest?
One of the biggest American lenders, Bank of America (BAC - Free Report) , released its second-quarter 2024 results earlier this week. Since then, the stock has gained 2.7% to $43.01 and is trading near its two-year high of $44.44. Even before the release of its quarterly numbers, the stock performed exceedingly well. It was among the top five banks that outperformed the S&P 500 Index in the first half of 2024.
This year, Bank of America has gained 28.5% compared with the S&P 500 Index’s growth of 16.2%. In 2023, the stock rose just 1.6%.
The surge in BAC stock has left many investors contemplating whether they've missed an investment opportunity or still have time to take a position.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
Technical indicators suggest continued strong performance for BAC. The stock trades above its 50-day and 200-day moving averages, signaling robust upward momentum and price stability. This technical strength underscores positive market sentiment and confidence in the company's financial health and prospects.
50-Day & 200-day Moving Average
Image Source: Zacks Investment Research
Factors Favoring the BAC Stock
Rate Cut Expectations: The Federal Reserve chairman, Jerome Powell, has signaled that the central bank is inching closer to cutting interest rates and cited recent inflation readings and the cooling job market as the primary reasons. Now, interest rates are at a 23-year high of 5.25-5.5% and acting like a double-edged sword for the banks. While high rates have led to a significant jump in net interest income (NII), they have driven up funding and deposit costs, thus squeezing banks’ margins.
For Bank of America, which is highly sensitive to interest rates, lower interest rates will be a boon and support net interest margin (NIM) expansion. The company’s NIM performance has been subdued for the last several quarters. Management thinks that in terms of its second-quarter NIM of 1.93%, it is under-earning. The metric is “going to go up over time. It'll go up as net interest income goes up,” with the normal figure being 2.3%.
Diversified Revenues: In the second quarter, like its peers – JPMorgan (JPM - Free Report) and Citigroup (C - Free Report) – the company leaned on solid Wall Street performance while the Main Street business faltered. BAC posted a double-digit rise in investment banking (IB) fees (in the Global Banking division). The company had a solid start to 2024, which left it in a good position, “with top three rankings now in North America, Latin America, and EMEA, and number six in APAC.” The company plans to leverage its scale and size and drive growth in the IB business. The capital markets business is expected to be the major factor contributing to the company’s top-line growth.
During the conference call following the earnings release, the company’s chief financial officer, Alistair Borthwick, stated that NII has bottomed out in the current rate cycle and “will begin to rise in Q3 compared to Q2 and then rise again in Q4.” In the second quarter, the metric declined 3% from the prior year as higher deposit costs weighed heavily on it.
Borthwick added that NII will likely be approximately $14.5 billion for the fourth quarter, an increase of more than 4% from the second-quarter 2024 level. This is based on expectations of three rate cuts (September, November and December), a low single-digit growth in loans and deposits asset repricing and a slowdown in deposit rotation. Also, the incremental swap roll-off in the second half of 2025 should support NII.
Technology: Digital solutions are the need of the hour, and Bank of America continues to deliver innovative digital solutions, particularly through its digital banking capabilities. This helps it attract and retain customers and boost cross-selling opportunities The consumer mobile banking app now serves more than 47 million active users, and roughly 23 million consumers use Zelle, which has become a dominant way to move money. In the wealth management division, almost 87% of its global banking clients are digitally active, and the company’s CashPro platform uses AI to streamline service requests. BAC plans to continue strengthening its technology initiatives and spend heavily on these.
Branch Opening: Bank of America has embarked on an ambitious expansion plan to open financial centers in new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets. Similarly, earlier this year, JPMorgan announced plans to open more than 500 new branches and renovate 1,700 existing ones by 2027.
Bank of America also remains committed to providing modern and technologically advanced financial centers through its ongoing renovation and modernization project. Over the past three years, it has been renovating and upgrading its existing financial centers across the country, with more than 2,500 centers renovated. This created offices and meeting spaces for clients to engage with financial specialists and ensured a consistent and modern experience across all centers. These initiatives, along with the success of Zelle, will enable the company to improve digital offerings and cross-sell several products and services.
Fortress Balance Sheet: Bank of America’s liquidity profile remains solid. As of Jun 30, 2024, average global liquidity sources were $909 billion. Also, the company’s investment-grade long-term credit ratings of A1, A- and AA- from Moody’s, S&P Global Ratings and Fitch Ratings, respectively, and a stable outlook allow easy access to the debt market.
Analyst Sentiments Improve
Following the release of quarterly numbers, analysts seem to be bullish about Bank of America’s prospects. Over the past seven days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
This upward adjustment, though small, reflects a positive sentiment among analysts and suggests encouraging prospects.
Estimate Revision Trend
Image Source: Zacks Investment Research
Is a Higher Valuation Sustainable?
The company is currently trading at a forward 12-month P/E multiple of 12.62X, above the industry average of 11.85X. The stock trades at a premium to its peer Citigroup’s current forward 12-month P/E of 9.88X.
Investors could face downside risks if the company's future performance does not meet expectations. The banking industry is still on shaky grounds. A tough landscape marked by economic slowdown, increased regulatory scrutiny, higher rising delinquency rates, concerns related to commercial real estate loans and persistent inflation woes could hinder BAC’s growth trajectory.
Price-to-Earnings (forward 12 Months)
Image Source: Zacks Investment Research
How to Play the Bank of America Stock?
While Bank of America has achieved milestones with its recent stock performance reaching new highs, caution is warranted for prospective investors. The company's global presence, diversified revenues, branch openings and technological innovations to attract and retain customers provide a solid base for organic growth.
BAC also continues to reward shareholders handsomely. As it cleared the 2024 stress test, the company announced its intention to increase its quarterly dividend by 8% to 26 cents per share, beginning in the third quarter of 2024. In the last five years, it increased dividends four times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio sits at 29% of earnings.
However, challenges like high interest rates, subdued loan demand because of the economic downturn, higher regulatory capital requirements as part of the Basel 3 end-game and uncertain macroeconomic backdrop cannot be ignored.
Also, BAC's premium valuation relative to industry peers raises concerns about sustainability, especially amid economic uncertainties and other challenges. Investors should consider these factors carefully and evaluate their risk tolerance before buying this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Those who already have the BAC stock in their portfolio can hold on to it because it is less likely to disappoint over the long term.