Bank of America (BAC) provides banking and nonbank financial services, operating in several segments, such as Consumer Banking, Global Wealth and Investment Management, Global Banking, Global Markets, and All Other. Bank Of America was founded in 1904 and is headquartered in Charlotte, North Carolina.
Shares of Bank of America have outperformed in 2021 having gains of about 49% year-to-date. I am neutral on BAC stock. (See Analysts’ Top Stocks on TipRanks)
2 Big Risks to Monitor in 2022
Bank of America in a report about the key risks in 2022 highlighted that among “economic risks are high inflation rates, the spread of variants like the recent Omicron strain, climate change, and supply constraints.”
From these economic risks, the biggest ones are rising inflation and COVID-19, with the latest Omicron variant already having caused turbulence in global financial markets.
Rising interest rates are favorable for banks, as they can increase their net interest rate spreads, the difference in the borrowing and lending interest rates, which is an important profitability key metric.
The Fed has been monitoring closely the inflationary pressures in the U.S. economy and the Omicron variant, which poses “downside risks to employment and economic activity,” not to mention the “increased uncertainty for inflation,” according to Fed chairman Jerome Powell.
Powell also stated that speeding up the tapering of its bond-buying program is likely. There are several factors now that are positive for Bank of America. Still, there are plenty of risks and concerns.
Q3 2021 Results
Compared to Q3 2020, net income rose 58% to $7.7 billion, or $0.85 per diluted share. Revenue, net of interest expenses, increased 12% to $22.8 billion.
Net interest income increased 10%, to $11.1 billion, due to strong deposit growth, related investment of liquidity, and Paycheck Protection Program (PPP) activities. What is notable though is that these financial results reported were helped by a reserve release of $1.1 billion and asset quality improvements.
It may be argued that one of the most positive factors that drove the financial performance of Bank of America is a return to business and economic activity to pre-pandemic levels.
There is a specific section for Bank of America’s Q3 2021 financial results citing the benefits of this organic growth to pre-pandemic levels, comparing several Q3 2021 to Q3 2019 year-to-date figures and trends. It also compares the first nine months of 2021 to the first nine months of 2019.
Some notable trends are the 56% increase for net new consumer checking accounts, the 40% increase for the average consumer checking account balance, the 167% increase for AUM Flows (assets under management), the 33% increase for consumer and small business digital sales, and 46% increase for equities sales & trading revenues.
Income investors have seen Bank of America returning to its shareholders $11.7 billion in Q3 2021, either through common stock dividends or share repurchases. The bank announced that starting in Q3 2021 it will increase its quarterly common stock dividend to $0.21 per share, an increase of 17% increase from the previous level, and a share buyback program of $25 billion was renewed. By the end of the third quarter of 2021, approximately $14 billion in stock had been repurchased.
The overall growth reported was apparent in other business divisions, as the Global Wealth and Investment Management division reported record net income of $1.2 billion, and Consumer Banking saw deposit balances exceeding $1 trillion for the first time, up 16% year-over-year. Global Banking reported record advisory fees of $654 million, up 65%, and Global Markets reported sales and trading revenue of $3.6 billion, up 12%.
Valuation
Data from CSI Market shows that BAC stock trades at a higher trailing P/E ratio (13.4) compared to the P/E ratios of its industry (8.5) and sector (8.2).
The P/S figure for BAC is 4.3, whereas the P/S figures for the industry and sector are 2.8 and 1.6, respectively.
Wall Street’s Take
Bank of America has a Moderate Buy consensus based on 11 Buys, four Holds, and two Sells. The average Bank of America price target of $48.26 represents 7.9% upside potential.
Disclosure: At the time of publication, Stavros Georgiadis, CFA did not have a position in any of the securities mentioned in this article.
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