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How to Play BAC Stock Amid Interest Rate Cuts & Branch Expansion Plan?
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The Federal Reserve has announced the first interest rate cut since March 2020. The central bank has lowered the rates by 50 basis points and signaled two more cuts this year. Against this backdrop, Bank of America (BAC - Free Report) is gaining investors’ interest.
For one of the largest American banks, interest rate cuts are expected to be a boon and support net interest yield expansion. Despite being the most interest rate-sensitive among its peers, Bank of America’s net interest yield performance has been subdued for several quarters because of four-decade-high interest rates that exert pressure on it.
During the pandemic, BAC piled up billions of dollars worth of long-dated Treasuries and mortgage bonds at low rates. With the Fed aggressively raising interest rates since early 2022, the company has been sitting on huge paper losses, hurting its net interest yield and net interest income (NII) expansion.
Net Interest Income
Image Source: Bank of America Corp.
Management believes 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 NIM being 2.3%.
Net Interest Yield
Image Source: Bank of America Corp.
At an investor conference in early September, Bank of America CEO Brian Moynihan stated that the bank’s NII troughed in the second quarter and is expected to rise in the quarters ahead.
This is now expected to get support from lower interest rates, too. As the Fed keeps lowering the interest rates further in 2025, BAC’s NII is likely to benefit. Meanwhile, its close peer, JPMorgan (JPM - Free Report) , is expected to record a decrease in 2025 NII due to interest rate cuts.
BAC’s Branch Expansion & Digital Initiatives
Bank of America’s aggressive branch expansion across the United States as part of a broader strategy to solidify customer relationships and tap into new markets will drive NII growth over time. The company announced plans to open more than 165 new financial centers by 2026-end, with nearly 40 set to open this year.
This new wave of expansion follows the branch network growth plans announced by Bank of America in June 2023. The plan focused on entering nine new markets, including Omaha, Boise and Milwaukee.
The bank's strategic investment in new financial centers and push into new markets reflect a broader industry shift toward optimizing branch networks to deepen customer relationships and tap into new business opportunities. In this competitive environment, the ability to blend digital convenience with in-person expertise is expected to give Bank of America long-term leverage in the evolving banking landscape.
BAC’s 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.
Digital Adoption
Image Source: Bank of America Corp.
Almost 87% of BAC’s 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. These efforts help it attract and retain customers and boost cross-selling opportunities.
BAC’s Fortress Balance Sheet & Solid Liquidity
Bank of America’s liquidity profile remains solid. As of June 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.
BAC continues to reward shareholders handsomely. After it cleared the 2024 stress test, the company increased its quarterly dividend by 8% to 26 cents per share. In the last five years, it has hiked dividends five times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio is 29% of earnings.
Dividend Yield
Image Source: Zacks Investment Research
In July, the company also authorized a $25 billion stock repurchase program, effective Aug. 1, to replace the previous program, which had $6.7 billion left for repurchase as of June 30, 2024.
Is BAC Stock Worth Betting On Now?
After a solid start to 2024, where BAC stock was among the top five banks on the S&P 500 Index, it seems to have lost momentum. In the nine months ended Sept. 30, BAC shares have been up only 17.8%. Meanwhile, the industry and the S&P 500 index have risen 19.3% and 20.5%, respectively. Also, BAC stock is trading below its peers — JPMorgan and Citigroup (C - Free Report) .
YTD Price Performance
Image Source: Zacks Investment Research
Bank of America stock is currently trading at the 12-month trailing price-to-tangible book (P/TB) of 1.59X. This is below the industry’s 2.07X. This shows the stock is inexpensive currently.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
BAC stock is cheap compared with JPM, which has a P/TB of 2.42. On the other hand, Citigroup has a P/TB of 0.73, making it inexpensive compared with BAC.
Analysts also seem to be bullish on Bank of America’s prospects. Over the past 60 days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
This upward adjustment reflects a positive sentiment among analysts and suggests encouraging prospects.
Bank of America's global presence, diversified revenues, branch openings, and technological innovations to attract and retain customers provide a solid base for organic growth. Also, favorable estimate revision trend, clarity on the Fed’s rate cut path and inexpensive valuation make the stock worth considering.
However, challenges like high funding costs, the expected economic downturn and higher regulatory capital requirements as part of the Basel 3 end-game cannot be ignored.
Investors should consider these factors carefully and evaluate their risk tolerance before buying BAC stock. Nonetheless, those who already own this Zacks Rank #3 (Hold) stock can hold on to it because it is less likely to disappoint over the long term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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How to Play BAC Stock Amid Interest Rate Cuts & Branch Expansion Plan?
The Federal Reserve has announced the first interest rate cut since March 2020. The central bank has lowered the rates by 50 basis points and signaled two more cuts this year. Against this backdrop, Bank of America (BAC - Free Report) is gaining investors’ interest.
For one of the largest American banks, interest rate cuts are expected to be a boon and support net interest yield expansion. Despite being the most interest rate-sensitive among its peers, Bank of America’s net interest yield performance has been subdued for several quarters because of four-decade-high interest rates that exert pressure on it.
During the pandemic, BAC piled up billions of dollars worth of long-dated Treasuries and mortgage bonds at low rates. With the Fed aggressively raising interest rates since early 2022, the company has been sitting on huge paper losses, hurting its net interest yield and net interest income (NII) expansion.
Net Interest Income
Image Source: Bank of America Corp.
Management believes 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 NIM being 2.3%.
Net Interest Yield
Image Source: Bank of America Corp.
At an investor conference in early September, Bank of America CEO Brian Moynihan stated that the bank’s NII troughed in the second quarter and is expected to rise in the quarters ahead.
This is now expected to get support from lower interest rates, too. As the Fed keeps lowering the interest rates further in 2025, BAC’s NII is likely to benefit. Meanwhile, its close peer, JPMorgan (JPM - Free Report) , is expected to record a decrease in 2025 NII due to interest rate cuts.
BAC’s Branch Expansion & Digital Initiatives
Bank of America’s aggressive branch expansion across the United States as part of a broader strategy to solidify customer relationships and tap into new markets will drive NII growth over time. The company announced plans to open more than 165 new financial centers by 2026-end, with nearly 40 set to open this year.
This new wave of expansion follows the branch network growth plans announced by Bank of America in June 2023. The plan focused on entering nine new markets, including Omaha, Boise and Milwaukee.
The bank's strategic investment in new financial centers and push into new markets reflect a broader industry shift toward optimizing branch networks to deepen customer relationships and tap into new business opportunities. In this competitive environment, the ability to blend digital convenience with in-person expertise is expected to give Bank of America long-term leverage in the evolving banking landscape.
BAC’s 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.
Digital Adoption
Image Source: Bank of America Corp.
Almost 87% of BAC’s 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. These efforts help it attract and retain customers and boost cross-selling opportunities.
BAC’s Fortress Balance Sheet & Solid Liquidity
Bank of America’s liquidity profile remains solid. As of June 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.
BAC continues to reward shareholders handsomely. After it cleared the 2024 stress test, the company increased its quarterly dividend by 8% to 26 cents per share. In the last five years, it has hiked dividends five times, with an annualized growth rate of 7.8%. Currently, the company's payout ratio is 29% of earnings.
Dividend Yield
Image Source: Zacks Investment Research
In July, the company also authorized a $25 billion stock repurchase program, effective Aug. 1, to replace the previous program, which had $6.7 billion left for repurchase as of June 30, 2024.
Is BAC Stock Worth Betting On Now?
After a solid start to 2024, where BAC stock was among the top five banks on the S&P 500 Index, it seems to have lost momentum. In the nine months ended Sept. 30, BAC shares have been up only 17.8%. Meanwhile, the industry and the S&P 500 index have risen 19.3% and 20.5%, respectively. Also, BAC stock is trading below its peers — JPMorgan and Citigroup (C - Free Report) .
YTD Price Performance
Image Source: Zacks Investment Research
Bank of America stock is currently trading at the 12-month trailing price-to-tangible book (P/TB) of 1.59X. This is below the industry’s 2.07X. This shows the stock is inexpensive currently.
Price-to-Tangible Book Ratio (TTM)
Image Source: Zacks Investment Research
BAC stock is cheap compared with JPM, which has a P/TB of 2.42. On the other hand, Citigroup has a P/TB of 0.73, making it inexpensive compared with BAC.
Analysts also seem to be bullish on Bank of America’s prospects. Over the past 60 days, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
This upward adjustment reflects a positive sentiment among analysts and suggests encouraging prospects.
Bank of America's global presence, diversified revenues, branch openings, and technological innovations to attract and retain customers provide a solid base for organic growth. Also, favorable estimate revision trend, clarity on the Fed’s rate cut path and inexpensive valuation make the stock worth considering.
However, challenges like high funding costs, the expected economic downturn and higher regulatory capital requirements as part of the Basel 3 end-game cannot be ignored.
Investors should consider these factors carefully and evaluate their risk tolerance before buying BAC stock. Nonetheless, those who already own this Zacks Rank #3 (Hold) stock can hold on to it because it is less likely to disappoint over the long term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.