Yahoo Finance Bank of America (BAC) Aided by Rates & Loan, Fee Income a Woe
Bank of America BAC remains well-poised for growth on decent loan demand, higher interest rates and a solid balance sheet. However, mounting operating expenses and fee income growth challenges are likely to hamper profitability.
Bank of America has been witnessing improvement in net interest income (NII) and net interest yield. The company's NII witnessed a four-year (ended 2022) compound annual growth rate (CAGR) of 2.4%. Likewise, net interest yield expanded to 1.96% in 2022 from 1.66% in 2021.
With the Federal Reserve expected to keep interest rates high in the near term, the company's NII and net interest yield are expected to keep rising. BAC expects NII (FTE) to be around $14.3 billion for the second quarter of 2023 and grow 7-8% for 2023. We project NII to grow 7% and expect the net interest yield to be 2.14% this year.
Despite a challenging operating environment, Bank of America's deposits and loan balances have remained solid over the past several years. As of Mar 31, 2023, the company’s total loans and leases grew 5.4% year over year to $1.05 trillion.
Management expects loan growth to be modest in 2023, while the deposit balance is expected to fall. We expect loans and leases to grow 3.1% this year. For 2024 and 2025, the metric is projected to increase 8.4% and 5.2%, respectively.
Further, analysts are bullish on the stock’s earnings prospects. The Zacks Consensus Estimate for Bank of America's current-year earnings has been revised 4% upward over the last 30 days. The company currently carries a Zacks Rank #3 (Hold).
Unimpressive fee income growth is a major headwind for BAC. Trading revenues (constituting almost 20% of total net revenues) witnessed a year-over-year decline in the first quarter of 2022 despite higher volatility. Although the metric improved in the remaining three quarters of 2022 and the first quarter of 2023, the performance of the trading business remains uncertain because of the volatile nature of the capital markets. We expect total sales and trading revenues to decline 6.7% in the second quarter of 2023.
Further, weakness in investment banking (IB) continued due to poor performance of the underwriting and advisory businesses across the industry. The poor IB performance is likely to persist in the near term till the macroeconomic and geopolitical uncertainty remains. We expect IB income to decline 4.9% this year.
Mounting expenses are concerning, as the company continues to make investments in technology and people across businesses. The total non-interest expenses rose 8.2% in 2021 and 2.9% in 2022. Despite Bank of America making efforts to manage expense levels by slashing headcount, continued investments in franchises and inflationary pressure will likely keep expenses elevated.
Management expects the full-year, non-interest expenses to be nearly $62.5 billion. Our estimates for total non-interest expenses indicate a CAGR of 3.8% by 2025.
In the past three months, shares of Bank of America have declined 19.2% compared with the industry's 16.3% fall.
Image Source: Zacks Investment Research
Banks Worth a Look
A couple of better-ranked stocks from the finance space are JPMorgan JPM and The Bancorp TBBK.
The Zacks Consensus Estimate for JPMorgan’s current-year earnings has moved marginally higher over the past seven days. Its shares have gained 4.1% in the past six months. Currently, JPM carries a Zacks Rank #2 (Buy).
The Bancorp currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised 6.5% upward over the past 30 days. In the past six months, TBBK’s shares have rallied 5.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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Bank of America Corporation (BAC) : Free Stock Analysis Report
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