Bank of America (BAC) is one of the biggest financial institutions worldwide, serving millions of individual consumers, businesses, and governments.
The company offers a wide range of financial services, including banking, investing, asset management, and risk management services.
Bank of America is currently the second-largest U.S. diversified bank in terms of market cap. Valued at $387.3 billion, it’s second only to JPMorgan Chase & Co. (JPM). In my previous article on the stock, I had mentioned that along with the rest of its industry peers, Bank of American is set to continue to benefit considerably from the ongoing excess supply of cash.
The ongoing monetary policy and stimulus check frenzy should keep acting as robust growth catalysts that will only keep boosting the company’s financials. With congress passing a $1.2 trillion bipartisan infrastructure bill last weekend, the current cash-rich environment should further sustain the ongoing liquidity euphoria.
The company’s most recent quarterly report displayed another period of excellent profitability and capital returns, solidifying my confidence in the stock. For this reason, I remain bullish on Bank of America. (See Analysts’ Top Stocks on TipRanks)
Q3 Results: Solid Profitability and Capital Returns
The ultra-cheap (and continuously declining) interest rate climate has rattled investors in the banking industry. Generally speaking, a decline in interest rates leads to compressed lending margins for banks. Recently, the Federal Reserve announced it would keep its overnight lending rate near zero, for now, suggesting that rates are not going to increase any time soon.
Bank of America is, of course, being negatively impacted by the lower rates, and the company’s most recent quarter again reflected this. Over the past nine months, the company recorded a net interest income of $31.5 billion versus $33.1 billion in the comparable period from last year.
However, due to strong growth in deposits in Q3, loan balances increased for the second consecutive quarter, leading to an improvement in net interest income (NII) even as interest rates remained low. Specifically, NII grew by 10% to $11.1 billion year-over-year.
Furthermore, the company managed to deliver a net income of $7.7 billion, a growth of 58% against Q3 2020. This was driven by, as mentioned, strong deposit growth, and Paycheck Protection Program (PPP) activities.
Share Repurchases to Boost EPS Further
As I have previously mentioned, Bank of America’s growing stock repurchases contribute significantly to EPS growth, and hence, to shareholder value creation. In 2019, Bank of America’s stock buyback activity hit a record of around $28 billion. Management suspended buybacks in the early stages of the pandemic to be cautious.
However, buybacks have now been reaccelerating. In Q3, the company repurchased a staggering $10 billion worth of shares, a significant increase from $4.21 billion in Q2. At this run rate, the company would essentially be buying back around 10.2% of its stock per annum.
Combined with the company’s latest 17% dividend hike, Bank of America has been spoiling its shareholders lately, offering massive capital returns.
The Valuation
Bank of America is currently trading at 14.90 times its forward net income, which should be a rather reasonable multiple.
Aided by the excess supply of cash, which should translate into higher deposits and investor inflows, as well as the company’s aggressive buybacks, EPS should keep soaring. For this reason, I remain bullish on the stock at its current levels.
Wall Street’s Take
Turning to Wall Street, Bank of America has a Moderate Buy consensus rating, based on 11 Buys, four Holds, and one Sell assigned in the past three months. At $48.03, the average Bank of America price target implies 1.5% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.
