Bank of America (NYSE:BAC), once on track to overtake JPMorgan as the top US bank, is now contending with growing interest rates and significant unrealized losses from its substantial portfolio of low-yielding mortgage securities, resulting in a $105.8 billion loss on Friday. This comes despite an impressive performance following the financial crisis, with BofA's stock returning 116% for the two years ended April 1, 2022, outpacing JPMorgan’s 70% gain.
UBS analyst Erika Najarian attributes this downturn largely to BofA's held-to-maturity securities portfolio. The cost of insuring against a BofA default has escalated to 97.3 basis points, as indicated by five-year Credit Default Swaps (CDS) of BofA, exceeding even JPMorgan, Wells Fargo, and Citigroup (NYSE:C).
In response to these concerns, CFO Alastair Borthwick confirmed during BofA's first-quarter earnings call that they are reducing their portfolio size and reallocating funds into cash and loans. Despite these measures, BofA's standing relative to other banks has significantly declined, with no immediate expectation of catching up with JPMorgan.
The impact of higher rates will be evident in its upcoming earnings report, with a projected profit increase of only 2.5%, overshadowed by JPMorgan’s 39% and Wells Fargo’s 74%. Najarian predicts a shift in market focus from the "two Bs"—bond losses and deposit betas, to the "two Cs"—credit and capital. This transition is already noticeable with a recent surge in bankruptcies.
BofA's capacity to manage losses when borrowers default will play a pivotal role in its future stock performance. Najarian suggests that predicting when net interest income (NII) on deposits will bottom out—potentially in Q1 2024—could help alleviate investor concerns.
Despite these challenges, BofA's stock remains relatively inexpensive at 8.2 times 12-month forward earnings, just above its financial crisis era low of 7.6 times. It's also trading at 1.03 times tangible book value, slightly above its Covid-era trough of 0.96 hit on March 20, 2020.
According to InvestingPro data, the company's market cap stands at 215.82B USD and its P/E ratio is 7.75. The revenue for the last twelve months (LTM2023.Q2) was 96.44B USD, showing a revenue growth of 5.63%. Despite the challenges, BofA has managed to maintain dividend payments for 53 consecutive years, a fact that might appeal to income-focused investors.
InvestingPro Tips suggests that BofA's revenue growth has been accelerating and it has raised its dividend for 9 consecutive years. Yet, 7 analysts have revised their earnings downwards for the upcoming period. Despite trading at a low P/E ratio relative to near-term earnings growth, the bank suffers from weak gross profit margins.
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