Is Bank of America Stock Undervalued?

Bank of America’s stock (NYSE: BAC) is down marginally YTD as compared to the 5% drop in the S&P500 index over the same period. Further, at its current price of $44 per share, it is trading 12% below its fair value of $50 – Trefis’ estimate for Bank of America’s valuation. The bank recently released their fourth-quarter results, beating the earnings estimates but marginally missing the revenue expectations. It posted total revenues of $22.06 billion – up 10% y-o-y. The consumer banking revenues increased 10%, primarily due to higher net interest income (NII). The NII benefited from strong growth in deposits balance and total earning assets, partially offset by lower net interest yield. Further, the wealth management unit grew 16% y-o-y driven by higher NII and an increase in total client balance. Notably, the total client balance increased 15% y-o-y to $3.84 trillion. In addition to this, the investment banking revenues jumped 33% in the quarter. Overall, the adjusted net income increased 30% y-o-y to $6.8 billion. It was partly due to higher revenues and partly due to lower expenses as a % of revenues. 

The company’s total revenues increased 4% y-o-y to $89.1 billion in 2021. It was primarily because of a 23% rise in investment banking revenues, followed by a 12% growth in the wealth management division. Further, the sales & trading unit posted a modest 3% gain, as most of the growth was offset by a 9% drop in the FICC (fixed income, currency & commodity) trading. Similarly, the consumer banking segment, which contributes close to 38% of the top-line, increased just 2% y-o-y due to lower outstanding loan balances. While the revenues grew just 4% in the year, the adjusted net income improved 85% to $30.6 billion. This was due to a favorable decrease in the provisions for credit losses from $11.3 billion to -$4.6 billion.

The Fed has recently increased the interest rates by 0.25%, expected to be followed by multiple rate hikes in FY2022. This will likely benefit the net interest margin of the lenders like Bank of America. Further, the wealth management business is likely to maintain its growth momentum driven by growth in assets. On the flip side, the sales & trading and investment banking revenues are anticipated to normalize over the subsequent quarters. Altogether, the Bank of America revenues will remain around $94.8 billion in FY2022. Additionally, BAC’s adjusted net income margin increased from 19.3% to 34.3% in 2021. We expect it to drop to roughly 28% in 2022, leading to an adjusted net income of $26.7 billion. This coupled with an annual EPS of $3.28 and a P/E multiple of just above 15x will lead to the valuation of $50.

Here you’ll find our previous coverage of Bank of America stock, where you can track our view over time.

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[1] Month-to-date and year-to-date as of 3/23/2022
[2] Cumulative total returns since the end of 2016

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