Tag: Bank of America Corporation (BAC)

Is Bank of America (BAC) Stock About to Plummet Into Collapse?

Posted on by The INO.com Team

The U.S. banking sector is undergoing a significant transformation, echoing societal shifts that saw payphones and video stores disappear into obsolescence. The silent erosion of bank branches has been transpiring within the financial sector for over a decade, beginning in 2010 and intensifying in recent years.

According to the U.S. Federal Deposit Insurance Bureau (FDIC), large commercial U.S. bank venues have sharply declined from 8,000 in 2000 to 4,236 by 2021, further dwindling to 4,194 in 2022. Normative banking procedures have been remarkably altered within this period, as evidenced by the dwindling count of U.S. branch bank sites directly linked to mainstream banks.

As per S&P Global Market Intelligence, U.S. banks closed 149 branches and launched 49 in March, culminating in an overall 78,588 operational branches.

Should this declining trend in bank branch numbers sustain momentum, bank branches could disappear within the next ten years. The Self Financial estimates that the U.S. bank branches will dip dramatically from about 60,000 in 2023 to 15,660 in 2030, with numerical reductions continuing until the projected total elimination of bank branches by 2034.

The national shift is exemplified by the Bank of America Corporation (BAC), the nation’s second-largest bank by assets, mapping plans to reduce the extent of its physical footprint through the closure of several branches across the U.S.

According to the OCC's weekly circular, the Charlotte, North Carolina-based bank is actively pursuing authorization from the Office of the Comptroller of the Currency to close the branches. The applications were filed with the regulator on October 5

It has gotten into the act, closing 5% of its physical locations in Philadelphia. The anticipated closures will have a significant impact nationwide.

Let’s first understand the reason behind the closures and identify why this trend has seen a significant acceleration over the past few years.

Recent years have seen an accelerated rate of bank branch closures, amplified by changing consumer behaviors and evolving banking infrastructures. The advent of the COVID-19 pandemic and subsequent social distancing mandates in 2020 and 2021 catalyzed this trend. As foot traffic was reduced to near zero at local branches, there was a soaring increase in the adoption of digital products and banking services.

Banks are directing more resources toward enhancing their online platforms to meet customer demands for digital banking services. Consequently, the need for physical branches has diminished, prompting banks to adjust their physical footprints constantly. The practical implications include enhanced bottom lines fueled by cost savings and greater investment into technological advancements.

As banks become more digitally savvy, the industry anticipates a continuous drop in the number of branches in operation.

The banking industry's consolidation through mergers and acquisitions has also been instrumental in accelerating this trend. Banks often buy out rivals to reduce overlapping staff, services, and facilities expenses. The result is increased profitability, with the closure of redundant branches being key to these cost-saving measures.

Large regional and national banks predominantly lead branch closure as their extensive networks provide ample cost-reduction opportunities. Nevertheless, banks of all sizes are progressively steering their investments away from physical locations and toward digital platforms.

During BAC’s quarterly earnings call, CEO Brian Moynihan shared that the company's consumer business headcount had decreased from around 100,000 to roughly 60,000 – a decline that continues as digital banking experiences an increased adoption.

As of 2022, a clear preference for online banking among U.S. adults at 78% was evident, while only 29% preferred traditional, in-person banking. The closure of BAC branches is unlikely to impact individual accounts directly; the bank provides several channels that allow customers to access and manage their accounts, including online banking, mobile banking, ATMs, and customer service centers.

However, there is an underlying concern that BAC could alienate less tech-proficient customers like senior citizens or those with disabilities. In certain communities, the closure of neighborhood banks has caused substantial damage to local economies and heightened existing financial inequities.

The ramifications of banks disappearing from communities extend beyond convenience — for instance, residents are forced to commute further to make elementary transactions such as deposits or withdrawals. This could potentially instigate a shift of these customers to other banking institutions.

BAC might consider implementing measures such as a fee waiver for retained customers or an added fee for closing an account within a specified timeframe. Both strategies could deter clients from changing banks and concurrently generate some revenue.

Let’s look at other factors investors could consider before investing in BAC.

BAC’s investment holdings presently display considerable unrealized losses, falling short of competitive rates since 2007. As of June 30, 2023, paper losses on their debt securities exceeded $109 billion, which surged to $136.22 billion by the end of the third quarter.

With approximately $603.37 billion entangled in held-to-maturity securities, the bank's considerable holdings in these low-yielding assets curb its capability to amplify profits through cash investments in money markets or higher-return assets.

BAC is anticipated to witness lower overall yields on its securities book for the foreseeable future. However, analysts do not expect the necessity for the bank to liquidate these holdings, thus avoiding additional losses.

The bank's securities portfolio tilts heavily toward debt maturing after ten years. If the Federal Reserve implements another potential rate hike, the valuation of these holdings could decline further, possibly leading to a decrease in earnings from BAC's investments.

Conversely, if interest rates stabilize or gradually decline, share prices may improve, given that the long-term securities held by the bank are expected to increase in value.

Furthermore, BAC reported a 4.5% year-over-year increase in net interest income in the fiscal third quarter of 2023, exceeding analyst expectations. However, it still lags behind its competitors, JP Morgan and Wells Fargo.

BAC has amassed unrealized losses amounting to $131.6 billion on securities, and even with government guarantees, it does raise red flags. Yet, with over $3 trillion in assets and $1.9 trillion in deposits as of September 30, 2023, BAC has sufficient financial stability to weather the storm.

For the average bank customer, an unrealized loss of this magnitude may not be of immediate concern; however, it does present a potential issue for investors. Coupled with the advantage of its massive insured customer deposits, BAC has protection against the kind of deposit flights that regional banks have undone.

Furthermore, BAC’s stocks declined about 11% year-to-date but trades above the 50-, 100-, and 200-day moving averages. However, Wall Street analysts expect the stock to reach $33.76 in the next 12 months, indicating a potential upside of 14.2%. The price target ranges from a low of $27 to a high of $51.

Furthermore, several institutions have recently modified their BAC stock holdings. Institutions hold roughly 69.9% of BAC shares. Of the 2,771 institutional holders, 1,148 have increased their positions in the stock. Moreover, 146 institutions have taken new positions (37,323,335 shares).

Bottom Line

BAC continues to streamline its operations, shifting toward a digital business platform as it grapples with decreased branch traffic and escalating maintenance costs.

The strategic shift may leave customers without access to a local branch, highlighting critical considerations for the effectiveness of the traditional cash system and underscoring the potential impact on sections of marginalized society that depend heavily on physical banking services.

Additionally, the prevailing macroeconomic volatility and high interest rates, projected to persist, raise concerns about an increase in BAC's unrealized losses, coupled with the potential customer transition to treasuries or Money Market Funds.

Despite these challenges, shareholders can take solace in knowing that BAC's management seems to be performing skillfully. Additionally, the era of high interest rates has resulted in a net benefit so far.

Interestingly, BAC’s interest-bearing deposits reached $1.31 trillion, reflecting depositor trust in its financial standing.

Although investor sentiment slumped over the past year, BAC maintains an impressive balance sheet fortified by sturdy profitability. Furthermore, it offers an enticing dividend yield of 3.25% on the current share price.

So, it could be wise for investors to hold on to the stock and look forward to a gradual capital appreciation. The unrealized losses might be less daunting for long-term investors focused on continuous dividend payouts.

However, investors seeking steady revenue should proceed with caution. While BAC's forward dividend yield stands at an attractive 3.25%, exceeding the four-year average yield of 2.44%, it still falls short of the 3.78% sector median.

Considering prevailing circumstances, it may be prudent for new investors to wait for a better entry point in the stock.

Bank of America (BAC) Just Crossed the 50-Day MA: Bearish Indicator?

Posted on by The INO.com Team

In the wake of regional bank failures earlier this year, the U.S. banking sector has grappled with substantial challenges, which include customer deposit deficits, rising deposit costs, sluggish loan growth, and diminishing profit margins. Yet, it demonstrated resilience later.

This ostensible resurgence became evident as the Federal Reserve propelled benchmark interest rates to the highest in over two decades, a trend expected to reverse in the forthcoming year. Amplified interest rates produce gains for banks due to elevated net interest income.

Despite this, the U.S. banking sector continues to bleed deposits. Throughout the second quarter alone, FDIC-insured banks experienced an almost $100 billion downward deposit shift. The industry's net income was diminished by $9 billion to $70.80 billion in the second quarter, with the average net interest margin contracting by three basis points to 3.28%.

Moreover, Federal Reserve Economic Data reveals a stunning $100 billion diminution in U.S. commercial banking deposits in just three weeks. Deposits plummeted from $17.38 trillion on September 27 to a disconcerting $17.28 trillion by October 18.

Furthermore, according to Moody's assessment, U.S. banks could struggle with at least $650 billion in unrealized losses in their securities portfolios, a 15% increase from the $558 billion losses experienced at the second quarter's end. This comes after expectations of extended higher interest rates led to a bond market collapse in the third quarter.

The share performance of the nation's second-largest financial institution, Bank of America Corporation (BAC), has languished alongside other bank stocks given these circumstances. BAC reported $131.60 billion in unrealized losses in its securities portfolio for the fiscal third quarter that ended September 30, 2023.

BAC continues to weather a period of economic volatility despite a 14% year-to-date decrease in its share values. However, investors are increasingly concerned about the bank's diversified investment portfolio status during long-standing escalated interest rates.

BAC’s early pandemic decision to allot billions into long-term Treasury bonds and mortgage bonds during a time of increased new deposits has now become a significant financial burden.

An influx of deposits accelerated by federal aid significantly outpaced the growth of loans during this period. The acting CFO at the time, Paul Donofrio, divided the surplus funds between long-term fixed-income products, with the remainder placed in short-term and floating-rate debt. This strategy was intended to safeguard the bank's net interest margin if rates stagnated or fell.

Over the years, BAC's CEO, Brian Moynihan, has consistently underscored that the bank stands to make significant gains when interest rates rise, backed by a solid deposit base ready for financial expansion following a strategic pivot by the Fed. However, amid the current high-interest rate climate, BAC has lagged among America's banking heavyweights.

Low-yielding investments and a decrease in the value of holdings upon the Fed's increased rates imply reduced earnings from its investments for BAC. Its investment holdings presently display considerable unrealized losses, missing competitive rates since 2007. As of June 30, 2023, these holdings show paper losses on those debt securities exceeding $109 billion, which increased to $136.22 billion by the third quarter's end.

With approximately $603.37 billion tied up in held-to-maturity securities, the bank's considerable holdings in these low-yield assets restrict its potential to maximize profits from cash investments in money markets or higher-return assets. The bank's comparatively lower overall yields on its securities book are projected to persist for some time. Analysts do not anticipate the bank needing to liquidate these holdings and incur a loss.

BAC’s securities portfolio is the largest and the least-yielding, heavily weighted with debt that matures after a decade. Should the Fed act upon another prospective rate increase, the valuation of these holdings may depreciate further.

Moreover, for the fiscal third quarter of 2023, BAC’s net interest income rose 4.5% year-over-year, surpassing the analyst's estimate, but it remains below its peers. JP Morgan’s NII grew about 30% year-over-year, while Wells Fargo’s NII climbed 8.3% year-over-year.

However, executives remain optimistic that the financial climate could ameliorate each quarter as the portfolio contracts and the remaining bonds decrease in duration. Even if rates stay where they are, interest income is poised to bolster as approximately $10 billion of holdings mature every quarter, the proceeds of which can be reinvested at more favorable rates.

Chief Financial Officer Alastair Borthwick indicates that these funds could go into cash where attractive yields are achievable or possibly for long-term investments, now offering superior coupons. More than a quarter of the bank's reserve remains frozen in debt securities, yielding roughly 2.4% in a market environment offering around 5%. As it stands mid-year, the accounted value of these securities has plummeted by close to $110 billion.

There were also signs from BAC that some of its customers are encountering problems as borrowing costs rise. Its net charge-offs were $931 million, up 79% from the year-ago quarter.

BAC, indeed, pays less than 2% on its significant deposit base. This allows it to maintain profitability through its loan and investment ventures, unlike smaller banks that face financial strain due to their new deposits costing more than what their older assets yield.

A potential shift in investor perspective may also benefit BAC. As investors shift their focus from bond losses and increasing deposit costs to credit and capital, BAC could surpass expectations and enjoy improved performance.

Bottom Line

Recent decisions by financial institutions have underscored the precarity of the contemporary banking landscape. The alarming revelation that the second-largest lending bank in the U.S. has unrealized losses of $131.6 billion on securities is exceedingly concerning, even with government assurances in place.

Prominent lending organizations have experienced setbacks in their bond holdings; however, BAC is particularly notable due to its size and impact. Possessing over $3 trillion in assets and $1.9 trillion in deposits as of September 30, 2023, the bank has considerable fiscal security to endure this turbulent period. It is anticipated that BAC will successfully navigate these rough waters.

CEO Moynihan has long championed a strategy of "responsible growth," which calls for the pursuit of profit without exposing the bank to unnecessary risk – a methodology instituted in 2014. However, some insiders argue that this cautious approach might neglect potential growth opportunities.
While unrealized losses do not generally affect the average bank customer, they may concern investors. This factor, combined with the massive scale of insured consumer deposits, construes BAC as less vulnerable to the type of deposit flight that sank regional banks.

Should interest rates stabilize and gradually decrease, it could trigger a rise in share prices since the long-term securities the bank holds are likely to gain in value.

Moreover, the unrealized losses may bear less significance for long-term investors focused on gaining from the bank's consistently escalating dividend payments. BAC boasts a solid balance sheet underpinned by sturdy profitability, and it currently offers an appealing dividend yield of 3.38% on the current share price. Investors can benefit from this by retaining the shares and waiting for potential capital appreciation.

While BAC's disproportionate portfolio does not create an immediate existential crisis, it significantly affects both the bank's earnings and investor interest. Even though it currently trades slightly above the 50-day moving average, considering prevailing circumstances, it may be prudent for investors to wait for a better entry point in the stock.

Bank of America (BAC) Under the Spotlight: Buy or Sell in the Face of Inflation Concerns?

Posted on by The INO.com Team

In the aftermath of three regional banking collapses earlier this year, the U.S. banking sector has wrestled amid dwindling deposits with customers seeking higher yields, escalated deposit costs, low loan growth, and shrinking profit margins. However, the industry showcased a degree of stability.

This semblance of recovery emerged as the Federal Reserve raised the benchmark interest rates to the peak in over two decades, a trend anticipated to reverse in the upcoming year. Typically, increased interest rates produce gains for banks through elevated net interest income.

Nevertheless, the U.S. banking sector persists in hemorrhaging deposits. Deposits have declined for the fifth consecutive quarter ending June 30, 2023. During the second quarter alone, FDIC-insured banks witnessed a nearly $100 billion drop in deposits.

Furthermore, the industry’s net income saw a $9 billion reduction to $70.80 billion in the second quarter, and the average net interest margin shrank by three basis points to 3.28%.

The perceived stability was also questioned merely two weeks after Moody's decided to downgrade the credit ratings of 10 mid-sized and smaller banks. Adding to the unease, bond rating agency Fitch has issued warnings, and subsequently, S&P Global Ratings cut the ratings of five American banks and put an extra two on alert, given the increasingly complex high-interest rate business climate.

Such a succession of downgrades from credit rating agencies could make obtaining loans more complex and costly for borrowers. Shares of the nation’s second-largest bank, Bank of America Corporation (BAC), suffered along with other bank stocks after Fitch’s warnings.

The Current Scenario

BAC has reported an increased number of its customers struggling with credit card payments, acknowledging that its credit card sector's performance lags behind expectations. Rising charge-off rates delineate this underperformance.

In the second quarter of 2023, the bank saw consumer net charge-offs hit $869 million, up from $571 million from the prior year quarter. Concurrently, provisions for losses remained steady at $1.1 billion.

A surge in the net charge-off rate and the delinquency rate of BAC's BA Master Credit Card Trust II were noted in August. Nevertheless, these rates are still below those recorded before 2019.

The net charge-off rate for the trust was 2.13% in August, up from 1.89% in July but significantly less than the 2.49% registered in August 2019. Likewise, BAC's delinquency rate escalated to 1.26% in August, slightly higher than July's figure of 1.24% but keeping under the 2019 benchmark of 1.57%. While these elevated rates might indicate stable consumer conditions, some may perceive them more pessimistically.

BAC's principal receivables outstanding were valued at $13.8 billion in August, suggesting a nominal shift in lending activity relative to the preceding month. Until recently, consumers were predominantly focused on clearing their credit card and other loan debts. However, current macroeconomic instabilities might put this trend into reverse.

The Real Picture

U.S. consumers have demonstrated robust financial activity throughout this year, with persistent spending expected to catalyze a third-quarter GDP growth of up to 3.5%. Harnessing the ability of credit cards and buy-now-pay-later (BNPL) services, consumers continue to shop. Despite various cost-saving efforts, current consumption patterns still surpass the average consumer's affordability.

Bank charge-offs and write-offs maintained a steady level until a shift occurred in July when the country's six major banking institutions disclosed the highest loan loss rates since the onset of the pandemic. Credit card repayments were disproportionately affected. Credit card loans constitute nearly 25% of BAC's total charge-offs.

These heightened charge-off rates signal potential challenges as more consumers default on their monthly payments. This trend is emerging in a financial landscape where consumers grapple with escalating costs and interest rates. Concurrently, wage stagnation lags behind inflation, and supplemental benefits have been reduced.

Current consumer spending reflects necessity instead of robustness. Consumers are compelled to spend more despite receiving marginally lower goods or services than before. Instances of arrears are recorded across multiple debt avenues, including credit cards, auto loans, mortgages, and student loans. The absence of immediate full payment has fostered a propensity toward overspending.

Unsustainable spending patterns may cause a downturn in consumer spending by early 2024, fueled by mounting credit card debts and dwindling pandemic-era surplus savings. The second quarter witnessed a 4.6% spike in consumer credit card debt, setting a record $1.03 trillion, as opposed to $986 billion in the first quarter.

As the burden of irrecoverable debt continues to strain lenders' financial stability, net charge-offs for BAC will keep rising.

Investors might want to consider the following additional factors:

Recent Developments

BAC has been imposed with staggering financial penalties in the recent past, totaling $250 million, following a series of dubious practices that include overdraft fee manipulation, withholding credit card rewards, and the initiation of unauthorized accounts. While this may have short-term impacts on its financial performance for the upcoming quarter, it is not expected to cause substantial overall financial implications.

Furthermore, the bank ended the second quarter incurring over $100 billion in paper losses due to its aggressive investment in U.S. government bonds. This figure significantly surpasses the unrealized bond market losses of BAC's competitors.

BAC's investments in technology are evidently paying off. Its digitization efforts have successfully translated into an unprecedented increase in Zelle transactions by more than double since June 2020, along with a digital banking adoption rate of 74% among households. Engaging customers via online and mobile transactions is significantly less costly for the bank than traditional in-person interactions.

Over the past three years, the financial institution has conscientiously refined and modernized its financial centers nationwide. This integral enhancement enables the bank to bolster its digital services and effectively cross-market various products.

By 2026, it envisages expanding its financial center network into nine emergent markets. In conclusion, its investments in technology are expected to bolster the bank's operating efficiency.

On August 29, BAC declared the introduction of its highly acclaimed Global Digital Disbursements platform to commercial clients who hold deposit accounts at the bank's Canadian branch.

With this innovative solution, users can process an array of B2C payments and C2B collections using the client's email address or mobile phone number as identifiers. This feature presents a cost-effective and user-friendly alternative for companies seeking to replace cash or cheque payments.

Robust Financials

For the second quarter ended June 30, 2023, BAC’s total revenue, net of interest expense, increased 11.1% year-over-year to $25.20 billion. Its net income applicable to common stockholders rose 19.7% year-over-year to $7.10 billion.

Additionally, its EPS came in at $0.88, representing an increase of 20.5% year-over-year. Also, its net interest income rose 13.8% over the prior-year quarter to $14.16 billion. In addition, its CET1 ratio came in at 11.6%, compared to 10.5% in the year-ago quarter.

Robust Growth

Over the past three and five years, BAC’s revenue grew at 8% and 2.5% CAGRs, respectively. Its net interest income for the same periods grew at CAGRs of 6.4% and 4.3%, respectively.

Net income and EPS grew at 13.6% and 18.8% over the past three years, whereas, over the past five years, these grew at 6.7% and 12.8%, respectively. The company’s total assets grew at 4.4% and 6.4% CAGRs over the past three and five years, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s trailing-12-month Return on Common Equity (ROCE) of 11.41% is 1% higher than the 11.30% industry average, whereas its trailing-12-month Return on Total Assets (ROTA) of 0.95% is 16.9% lower than the 1.15% industry average.

The stock’s trailing-12-month cash from operations of $44.64 billion is significantly higher than the industry average of $137.73 million.

Growing Institutional Ownership

BAC’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their BAC stock holdings.

Institutions hold roughly 69.7% of BAC shares. Of the 2,816 institutional holders, 1,226 have increased their positions in the stock. Moreover, 139 institutions have taken new positions (42,890,796 shares).

Price Performance

The stock has declined 13.5% year-to-date to close the last trading session at $28.65. However, over the past year, it lost 17.4%, whereas over the past six months, it gained 3%.

Shares of BAC have been making lower highs for the past 12 months, but they have not made a low since March. Its share price displayed upward and downward movement multiple times from January to September 2023. The overall value so far declined compared to the beginning of the year.

Moreover, BAC’s stock is trading below its 100-day and 200-day moving averages of $29.19 and $30.7, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $35.13 in the next 12 months, indicating a potential upside of 22.6%. The price target ranges from a low of $27 to a high of $49.

Mixed Analyst Estimates

For the fiscal year ending December 2023, analysts expect both BAC’s revenue and EPS to increase 6.3% year-over-year to $100.91 billion and $3.39, respectively. Its revenue and EPS for fiscal 2024 are expected to decline 0.8% and 4.2% year-over-year to $100.13 billion and $3.25, respectively.

Moreover, for the quarter ending September 2023, its revenue is expected to surge 2.5% year-over-year to $25.12 billion, whereas its EPS is expected to decline marginally year-over-year to $0.80.

Bottom Line

The recent upturn in bank charge-offs marks a return to normalcy for the industry after an unprecedented period of low levels during the pandemic, attributed largely to decreased unemployment and substantial government financial relief initiatives.

However, this surge in 2023 introduces an anomaly in the banking sector. Several banking institutions have acquiesced under pressure, and financial experts caution that should unemployment rise above 7%, the industry could face significant complications.

Moreover, consumers will face the reinstatement of student debt payments throughout the latter half of the year, as the forbearance period concludes in October. This would force customers to navigate difficult choices regarding credit card and student debt payments, potentially causing a broader impact on delinquency rates nationwide.

Major banks maintain a positive front that there is little cause for concern moving forward. However, this optimism may rely heavily on steady unemployment rates around the 5% mark - a contingency for which plenty of banks have pre-prepared provisions. Yet, if unemployment rates deteriorate further, banks and consumers could encounter hardship during the latter half of 2023.

Despite the adversities presented, BAC continues to display a robust capacity for growth amidst a tumultuous climate. Notably, despite a downshift in revenues and net income for its Global Wealth and Investment Management unit during the second quarter, the bank still surpassed Wall Street's top and bottom-line estimates.

Also, in the last reported quarter, when most finance firms recorded subdued Investment Banking business performance, BAC’s IB numbers were impressive. Its total IB fees of $1.21 billion increased 7.4% year-over-year, which boosted its global banking unit's net income by 76% to $2.7 billion.

Nevertheless, considering the bank’s tepid price momentum, mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.

How Will Bank of America (BAC) Stock Fare Against Scandal?

Posted on by The INO.com Team

America’s second-largest bank by assets, Bank of America Corporation (BAC), is mired in a scandal involving double-dipping on fees imposed on customers with insufficient funds in their accounts, withholding reward bonuses that were promised to credit card customers, and misappropriating sensitive personal information to open accounts without customers’ knowledge or permission.

The Consumer Financial Protection Bureau (CFPB) director Rohit Chopra said, “Bank of America wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent. These practices are illegal and undermine customer trust. The CFPB will be putting an end to these practices across the banking system.”

The bank has been ordered to pay $250 million in fines and refunds, with the CFPB and the Office of the Comptroller of the Currency (OCC) saying that BAC has violated several laws since 2012. While the CFPB ordered BAC to pay $100 million to the affected customers and $90 million in penalties, the OCC ordered BAC to pay a penalty of $60 million. The $250 million in fines and refunds will pressure the company’s near-term financials.

This is not the first time that U.S. regulators have fined BAC. In 2014, the bank was fined $727 million for “illegal credit card practices.” In May 2022, the CFPB ordered the bank to pay a $10 million civil penalty over unlawful garnishments, and additionally, it was fined $225 million by the CFPB and OCC last year automatically and unlawfully freezing customer accounts with a fraud detection program during the pandemic.

Since the bank was ordered to pay the penalties and refund, the stock has gained marginally. However, the stock has lost year-to-date and over the past year.

Looking at BAC’s recently reported financials, the Global Wealth and Investment Management segment’s revenue declined 3.5% year-over-year to $5.24 billion for the second quarter. The segment’s net income declined 15% year-over-year to $978 million due to the global slowdown in the deal-making business.
For the quarter that ended June 30, 2023, BAC’s EPS and revenue beat the consensus estimates. The bank has set aside $602 million as a provision for credit losses.

Here’s what could influence BAC’s performance in the upcoming months:

Robust Financials

BAC’s net interest income for the second quarter ended June 30, 2023, increased 13.8% year-over-year to $14.16 billion. Its return on average assets came in at 0.94%, compared to 0.79% in the year-ago period. The company’s net income applicable to common shareholders rose 19.7% year-over-year to $7.10 billion. Its EPS came in at $0.88, representing an increase of 20.5% year-over-year.

Mixed Analyst Estimates

Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 5.3% and 5.5% year-over-year to $3.36 and $100.14 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 2.4% and 0.7% year-over-year to $3.28 and $99.47 billion, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s 11.02% trailing-12-month Return on Common Equity is 1.1% lower than the 11.15% industry average. Likewise, its 0.90% trailing-12-month Return on Total Assets is 20.2% lower than the 1.12% industry average.

On the other hand, the stock’s 30.28% trailing-12-month net income margin is 17% higher than the industry average of 25.87%.

Bottom Line

BAC has been previously fined for other illegal practices, but the bank managed to navigate the rough waters, growing from strength to strength. Although its revenues and net income from the Global Wealth and Investment Management segment took a hit in the second quarter, the bank managed to beat Wall Street EPS and revenue estimates.

Although the penalty and refund of $250 million might dent its financial performance over the next quarter, it is unlikely to affect its financials significantly. Moreover, BAC was left with $106 billion in paper losses at the end of the second quarter due to its decision to invest heavily in the U.S. government bonds market. The amount is significantly higher than its peers’ unrealized bond market losses.

Given its mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.

Inflation Eases: Stocks to Watch Amid Q2 Financial Earnings

Posted on by The INO.com Team

After an eventful year, corporate America's crème de la crème is set to kick off the second-quarter earnings season.

The performance of banking majors, such as JP Morgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Citigroup, Inc. (C), which are scheduled to report on Friday, July 14, would be indicative of the overall health of the economy. Their numbers, specifically deposit flows and loan growth, might impact the share prices of regional banks, which attracted much-unwanted attention earlier in the year.

As the economy seems to be finding its way into calmer waters with a greater-than-expected moderation of inflation, before we discuss the outlook for the trio of major banks ahead of their earnings release, for the uninitiated, here’s a brief recap of upheavals they had to live through and work their way around over the past year.

How We Got Here?

As the “transitory” inflation in the aftermath of the beginning of the armed conflict in Ukraine morphed into a not-so-transitory and vicious feedback loop that resulted in decades-high inflation, the Federal Reserve and other major central banks chose to respond with aggressive interest-rate hikes.

While the increased borrowing costs took the wind out of the sails of an overheating economy, it resulted in significant markdowns in the “ultra-safe” long-term U.S. Treasury securities in which many of the regional banks had invested their mushrooming deposits of cash, mostly received as stimulus during the pandemic.

However, as the going got tough for various businesses amid increased borrowing costs, the banks’ clients began to dip into their deposits. In such a scenario, to meet its payment obligations, the banks’ mark-to-market losses rapidly crystallized into realized ones.

Consequently, Silicon Valley Bank (SBV) announced that it booked a $1.8 billion loss, and the chaos and panic triggered by its failure wiped out a combined $52 billion in the market value of JP Morgan Chase & Co. (JPM), Bank of America Corporation (BAC), Wells Fargo & Company (WFC), and Citigroup, Inc. (C).

Credit Suisse and First Republic Bank became two other casualties, which JPM and UBS proactively absorbed.

The banking turmoil proved to be teasers to a similar, but orders of magnitude larger, scare. As the U.S. Treasury looked set to exhaust its ‘extraordinary measures’ to manage the national debt by June 5, the world’s richest economy, which also issues the global reserve currency, was projected to run out of cash and fail to meet its obligations, until the self-imposed debt ceiling was raised or suspended.

With the extent to which the U.S. and global economy could be undermined if the default comes to pass deemed by treasury secretary Janet Yellen an “economic catastrophe,” it is not difficult to understand why business leaders, such as JPM Chief Jamie Dimon, convened a ‘war room’ over the debt ceiling standoff.

However, calmer and more rational heads prevailed in Washington, D.C., albeit at the eleventh hour. President Joe Biden and House Speaker Kevin McCarthy reached an agreement to suspend the current $31.4 trillion statutory debt ceiling until January 1, 2025, in exchange for discretionary spending caps for six years.

Where Are We Now?

Post the shakeups, all 23 banks successfully weathered the Federal Reserve’s annual stress test toward the end of the last month. Even in a severe recession scenario simulated in the test, the banks were able to maintain minimum capital levels, despite $541 billion in projected losses for the group while continuing to provide credit to the economy.

Given the endurance and resilience that was successfully displayed, an indication of lighter capital requirement resulted in banks, such as JPM, WFC, The Goldman Sachs Group, Inc. (GS), and Morgan Stanley (MS), using resources freed up to payout higher dividends to their shareholders.

JPM will lift its quarterly dividend to $1.05 a share from $1, while WFC will hike dividends to $0.35 from $0.30. Moreover, both banks have said that they have the capacity to repurchase shares. Despite an increase in minimum capital requirement from 12% of risk-weighted assets last year to 12.3% after this year’s test, C’s board has also approved a dividend increase from $0.51 per share to $0.53.

The stocks have gained over the past month, given the demonstrated staying power and the potential windfall for the shareholders.

The (Probable) Road Ahead

For the second quarter of the fiscal year:

JPM’s revenue and EPS are expected to increase by 32.1% and 37.7% year-over-year to $39.12 billion and $3.80, respectively.

WFC’s revenue and EPS are expected to increase by 22% and 39% year-over-year to $20.07 billion and $1.14, respectively.

C’s revenue is expected to increase by 8.3% year-over-year to $19.35 billion. However, its EPS is expected to decline by 38.7% over the prior-year period to $1.41.

While the outlook seems largely optimistic, some analysts have warned that large banks' earnings have peaked with continued declines in net interest incomes, normalization of credit costs, and increased expenses due to inflation.