The market response to Bank of America‘s (NYSE:BAC) The first quarter results were decidedly bearish – and understandably so. Net interest income declined, while write-offs of impaired loans increased. These figures confirmed investors’ worst fears. Although they have rebounded somewhat in the meantime, from peak to trough, BofA shares are down more than 10% from their high in early April.
However, before jumping on the bearish bandwagon, you may want to take a step back and look at the bigger picture. This recent setback actually represents a buying opportunity.
Bank of America’s problems are already coming to a head
Do not mistake yourself. Bank of America certainly has a lot to discover here. Charges almost doubled year-over-year, going from $807 million in the first quarter of 2023 to $1.5 billion this time around. Net interest income also fell 3% to $14 billion as the costs of compensating depositors rose slightly more than the interest rates it charges its borrowers. Its own portfolio of “held-to-maturity” bonds lost $109 billion in market value (nearly 20% of the portfolio’s previously reported value) due to rising interest rates. These are all obvious problems.
However, there is nothing insurmountable in these impasses… or even new. BofA has been here before. This is because the banking the business is, as one might expect, cyclical. Savvy investors understand that good times reliably follow bad times.
The ebb and flow of interest rates is perhaps the most important component of the banking business cycle. They rise and fall with inflation, which is often a function of economic strength. But as the economy constantly strengthens and weakens, interest rates reliably rise and fall.
So what? We are probably closer to the end of a wave of rising interest rates than the beginning of one. The Federal Reserve has actually said it is considering rate cuts for this year, which should ultimately lead to lower overall market-based interest rates. This will reduce costs for borrowers, thereby boosting demand for new loans. In this vein, Bank of America CFO Alastair Borthwick explained during Tuesday’s earnings conference call: “We continue to expect the second quarter to be the low point in NII (net income from ‘interest) and we expect growth during the second half of 2024.”
The bank’s skyrocketing write-offs also come with a critical footnote. In other words, credit card delinquencies and defaults are responsible for the lion’s share of these charge-offs. However, skyrocketing inflation and record credit card interest rates are creating unique credit-using circumstances that are unlikely to worsen – or even continue – in the future.
Where BofA is already winning
In the meantime, several things are going very well for BofA at the moment.
Take the company’s corporate fundraising activities as an example. Investment banking fees rose 35% year over year last quarter. This could be the first glimpse of an imminent rebound for the entire capital markets.
Business loan revenues also increased, despite rising interest rates. Business deposits increased from $493 billion in the first quarter of last year to $526 billion in the first quarter of 2024, suggesting that businesses not only have more liquidity, but remain able to use it. access quickly.
Bank of America’s investor services business is also operating at full capacity. Revenue at its Global Wealth and Investment Management arm rose 5% in the first quarter, reaching a record $5.6 billion. Brokerage and advisory client balances also hit a new record of nearly $4 trillion during the first quarter of this year. Part of this improvement is the result of market gains. However, a significant portion of this growth is simply the result of wealthier customers bringing their money to BofA to invest. The bank’s brokerage arm, Merrill Lynch, attracted 6,500 new customer households last quarter.
Meanwhile, ordinary people continue to trust Bank of America with more of their money. Although total consumer deposits fell 7% to $952 billion in the first quarter, that could largely be because more money was spent on necessities like groceries or rent . The company added (net) 245,000 new consumer checking accounts last quarter, bringing its total to a record 36.9 million. It could also be that these people are simply putting more of their money into the stock market rather than into bank accounts. Consumer and retail investment assets increased 29% to a record $456 billion in the first quarter.
There’s more to liking Bank of America stock than not liking it
Is this the most valuable stock you can own? No. Even within the financial sector, you’ll likely find growth prospects at least as attractive, if not more so.
If you’re specifically hesitant to jump into BofA stock — or know you need exposure to the dividend-paying banking sector in your portfolio — this pullback is a great opportunity.
Bank of America is one of the most comprehensive and proven names in banking. It is also large enough to maintain its dominant share in all its money-related activities. This unfair advantage means it is well-positioned to take advantage of the next wave of economic growth, which may well be already underway. You would take this opportunity when the stock price is only 11.2 times this year’s expected earnings per share and the dividend yield is sitting at a healthy 2.8%.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions with and recommends Bank of America. The Mad Motley has a disclosure policy.
Buy Bank of America stock during this decline. Good prevails over evil. was originally published by The Motley Fool
