Bank of America Corp. (BAC), which more than doubled over the three years through mid-March of this year to reach its highest level since just before nearly going under during the financial crisis, is now down almost 15% off that March high. But while investors worry that the economy is nearing the end of its cycle and fretting over the possibility of peak earnings, some think Bank of America is now priced at a bargain and the best positioned out of all six big U.S. banks. Banking analyst Mike Mayo at Wells Fargo, who has an outperform rating on the stock and a price target of $37, told Barron’s, “I hear all the time that these are peak earnings for Bank of America. We couldn’t be more adamant that these aren’t peak earnings.”
Bank of America vs. Rivals
|Bank of America||- 5.8%|
|Goldman Sachs||- 10.9%|
|Wells Fargo||- 11.7%|
|Morgan Stanley||- 12.5%|
|KBW Nasdaq Bank Index (BKX)||- 6.8%|
|S&P 500||+ 2.5%|
Source: CNN Money, as of 4pm EST 11/1
What It Means
A strong investment case could be made for each of the big six as all of them are trading within a range of 8 to 11 times forward earnings compared to the S&P 500’s forward multiple of 16.4, and nonperforming assets are at relatively low levels across the banking sector. But Bank of America stands out for Mayo, who points out that the bank’s own nonperforming assets fell 21% during the third quarter from a year ago.
With a longer-term perspective in mind, Mayo thinks Bank of America’s earnings will rise to around $4 per share in 2022 from their current projected level of $2.55 this year. That’s a nearly 60% increase in 3–4 years. At $0.66 per share in the most recent quarter, those earnings rose 43% in just the past year, and the bank is returning nearly all of its net income to shareholders in the form of buybacks and dividends.
Bank of America’s Upside
|Price Target||Closing Price||Upside|
Source: Barron’s, Yahoo! Finance, as of 4 pm EST 11/1
Supporting the earnings outlook, Bank of America has one of the best consumer banking franchises, an industry-leading wealth management business, modest international exposure, and strong expense controls. Accompanied by its aggressive stock buyback program and it’s not difficult to see why Mayo is calling for the bank’s shares to rise more than 30%. Also noting the stock buybacks and strong earnings gains, Morgan Stanley analyst Betsy Graseck, in a recent note to clients, advised investors to “dig in.”
There are some concerns, however, with rising interest rates creating a greater disincentive for consumers and businesses to borrow. In the third quarter, Bank of America’s loan growth slowed to 3% from 5%, year over year, in the second quarter. If the economy does slow, then loan growth would be expected to decline even more. Also, banks are still feeling the effects of the negative reputation they gained during the financial crisis, something they will continue to have to work at in order to regain investor confidence.