BAC with Nobias Technology: Can Bank of America Continue its Strong 2021 Rally?
After being unloved for the better part of a decade (due to their poor performance during the Great Recession period) big bank stocks have come to the forefront of the market in 2021, generating some of the best year-to-date returns within the S&P 500. This week, Bank of America (BAC) posted its second quarter earnings and several of the highly rated analysts that we track with the Nobias algorithm came out with reports on the news. Therefore, we wanted to highlight their opinions on the stock’s recent report to see whether or not the outperformance that BAC shares have generated throughout 2021 thus far is likely to remain in place.
Although Bank of America got off to a hot start in 2021, rising some 36% during the first six months of the year, BAC shares have experienced a bit of a dip over the last month or two, falling approximately 12.8% from their recent 52-week highs, as the story associated with rising rates has lost its steam.
However, Bram Berkowitz, a Nobias 4-star rated analyst who writes for The Motley Fool, recently published an article highlighting the company’s 2021 strength and discussing why it is that he continues to believe that the bank is a solid potential long-term investment. Berkowitz began his piece saying, “Shares of America's second-largest bank by assets had a tremendous first half of the year as the economy reopened and began to recover from the unprecedented coronavirus pandemic in 2020. The big story for Bank of America was strong credit quality, strong performance in its non-lending businesses, and a promising outlook for loan growth and future rate hikes.”
Berkowitz noted that the 2020 pandemic could have been catastrophic for big banks like Bank of America; however, the Federal Reserve acted quickly in the face of the pandemic threat, dropping its federal funds rate to zero and flooded the economy with liquidity which stopped BAC from experiencing unexpected loan losses. He wrote, “However, thanks to trillions of dollars in government stimulus and other interventions from the Federal Reserve and federal government, the billions in losses that banks expected never materialized. In the first quarter of this year, Bank of America released $2.7 billion of reserves previously built up for loan losses back into earnings.”
The dovish policies by the Fed during the pandemic plus the idea that rates are headed higher in the short-term (during 2021, they’ve risen from ~0.91% to ~$1.30% thus far) creates a scenario that is bullish for banks. Rising rates is an easy way to predict higher earnings for big money center banks like BAC because of the net interest income that it should help them to produce. However, Berkowitz points out that much of this bullish sentiment is already priced into stocks. He writes, “Bank of America's stock is now trading as high as it has since the Great Recession, and higher than where the bank traded before the pandemic. The bank also now trades at a very high valuation of 191% of tangible book value (equity minus intangible assets and goodwill).”
Berkowitz concludes his article writing, “But while the valuation is high, I still really like how Bank of America is positioned long-term.” He says that BAC weathered the pandemic well and continues to have “strong credit quality” and a “very sturdy balance sheet”. And, in the event that rates do move higher, BAC is likely to be a major beneficiary.
All in all, he says, “Some of this is surely priced in, but it's hard to look at Bank of America right now and not see a tremendous banking business well positioned for the future.” And, Berkowitz isn’t the only blue chip rated (4 or 5-star) author that publishes content at the Motley Fool who is very bullish on BAC shares.
In a recent Motley Fool podcast, Nobias 5-star rated analyst, Matt Frankel discussed Bank of America in a very bullish light, explaining why it’s his largest personal holding. Matt Frankel said, “Bank of America CEO Brian Moynihan just put out a report this morning or he said this morning that consumer spending is up by 20%, not over last year, but over June 2019, pre-pandemic levels. So 20% over pre-pandemic levels and that's across credit cards, debit cards, and the Zelle money transfer platform.” And, he noted that travel expenses are still down 15% from pre-pandemic levels, but he sees those numbers improving as well. He noted the pent up demand to get out of the house after the social distancing related to the COVID pandemic, saying that after 2020, “We have a newfound appreciation for being able to do things, and this could be a really big trend for the banking sector [referring to travel and leisure].”
How does this relate to Bank of America? Well, Frankel notes, “Banks make their money primarily by lending money and earning interest. Bank of America, in particular, has a very high proportion of non-interest-bearing deposits. Almost 40% of their entire deposit base, they don't pay their depositors interest on. That's a pretty big number. It's over $700 billion of deposits are non-interest-bearing at Bank of America. That means as the economy heats up, as people are spending money, that should lead to rising interest rates.”
With regard to a spending increase, he says, “That's a when not an if.” And, Franklel confused his bullish out BAC shares saying, “I think Bank of America could be one of the biggest beneficiaries of the reopening for several years to come.” Then, he doubled down on this bullish stance, highlighting not only the potential benefit of increased spending activity across the consumer economy, but also the fact that unlike many stocks in today’s market, Bank of America appears to be immune to threats associated with rising inflation. He makes his final point, exclaiming, “It's one of the few stocks even on this list that doesn't have that much to worry about from inflation. Inflation is a good thing from the bank's perspective. I'm a big fan of Bank of America. It's the biggest bank holding in my portfolio, it's the biggest bank holding in Warren Buffett's portfolio…” In other words, Frankel feels very confident about this position, essentially putting his money where his mouth is.
So, do the Bank’s fundamental results back up this bullish sentiment? Bank of America posted its Q1 earnings this week, with mixed results. The bank beat Wall Street estimates on the bottom-line, with GAAP earnings-per-share coming ni at $1.03/share, which was $0.26/share above expectations. However, BAC’s $21.47 billion in revenue was a bit disappointing, missing analyst estimates by $300 million and representing -3.7% year-over-year growth.
Net interest income was down 6% during the quarter, due primarily to lower interest rates that we saw during the same period a year ago. However, the company’s management was much more forward looking, with CEO Brian Moynihan, Chairman and CEO echoing the data expressed by Frankel above, saying, "Consumer spending has significantly surpassed pre pandemic levels, deposit growth is strong, and loan levels have begun to grow.”
Bank of America’s CFO says “At the same time, our balance sheet remains a source of strength, as supported by our performance in the most recent stress tests, which showed significant excess capital. We returned nearly $6 billion this quarter in common dividends and share repurchases and we expect to return a higher amount in the coming quarters, while we continue to deliver for our clients and the communities that we are so fortunate to serve." Back in April, Bank of America announced a $25 billion share buyback program, which should help the company to continue to grow its bottom-line. And, as Nobias 4-star rated analyst, Liz Kiesche, who serves as a Seeking Alpha news editor, pointed out recently, after passing the Federal Reserve's quality screens, Bank of America also plans to increase its dividend by 17%, starting with the Q3 payments.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
These increased shareholder returns point towards a bullish outlook by management with regard to cash flow generation and with that in mind, it should come as no surprise that the vast majority of credit analysts that Nobias tracks are bullish on shares. In short, it appears that investors are going to have to wait and see what the macro economy does (big banks are notoriously economically sensitive) with regard to BAC’s second half performance. Assuming that rates head higher (as most analysts seem to believe) then the bank’s bottom-line will likely continue to grow. But, as Berkowitz points out, the stock is expensive, so this growth must occur to justify the elevated multiples.
Right now, 83% of the credible authors that our algorithm tracks have established bullish positions on BAC shares. However, over the last month, after BAC’s big rally to start the year, we’re seeing more balanced opinions being posted. Since June, we’ve tracked 12 analyst reports posted by 4 and 5-star rated authors and they’re split down the middle in terms of buy and sell ratings. We saw 5 “Buy” ratings, 2 “Neutral” ratings, and 5 “Sell” ratings. With that in mind, it appears that BAC is a bit of a battle ground stock due to its elevated valuation and the uncertainties facing the broader economy.
Right now, the average price target provided by the blue chip analysts that we track for BAC is currently $39.50, which means that even after the stock’s strong 25% year-to-date gains (which beats the S&P 500’s 15% year-to-date gains by a significant margin), the stock appears to have upside potential of 4.1% (relative to its current share price of $37.92).
Disclosure: NIcholas Ward has no position in BAC. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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