Should You Buy Bank of America Stock?

Since the end of October last year, Bank of America (Blood alcohol concentration) 1.32%) Stocks soared 58% after the Federal Reserve signaled it would end its rate hike campaign. Stocks rose significantly as investors priced in the possibility of rate cuts and pauses later this year and next. That could help ease pressure on banks with significant unrealized losses on their loan portfolios.

But it is still unclear what will happen to interest rates later this year or next year. The market had expected up to six rate cuts this year. That expectation has now been reduced to two cuts. Given the recent surge in stock prices, is it wise for investors to buy now? Here are a few things to consider first.

Bank of America’s surge in unrealized losses is drawing investor attention.

Bank of America has more than $2.5 trillion in total assets, making it the second-largest bank in the United States. JP Morgan Chase. Its sheer scale makes it a behemoth, and over time it has established itself as one of the largest banks in the United States.

Banks are simple businesses that accept deposits and lend money to customers. Banks make money on the difference between the interest rates charged on loans and the interest paid to customers on deposits.

This business model makes the industry sensitive to interest rate fluctuations, and Bank of America’s sensitivity is evident when you look at its loan portfolio. These mounting unrealized losses have become a concern among some investors as the Federal Reserve raises interest rates at the fastest pace in decades. Since the Federal Reserve began raising interest rates in 2022, the bank’s unrealized losses have increased from $14 billion to $113 billion.

Unrealized losses represent the losses Bank of America would incur if it had to sell its securities in today’s market. This does not necessarily mean that banks are in trouble as long as they can hold the securities to maturity. However, due to the influx of deposits from Silicon Valley Bank (subsidiary) SVB Finance) Last year, the bank raised capital and took huge losses on Treasury bonds, losses that could have been worse had the Federal Reserve not intervened.

Bank of America, one of the largest and best-known banks in the United States, has a well-diversified deposit base, with 37 million consumer checking accounts and nearly $2 trillion in personal and corporate deposits. This provides a stable foundation for its business and makes it less vulnerable to bank runs, such as those of Silicon Valley Bank and other regional banks last year.

BofA’s net interest income could continue to rise

The higher interest rate environment is a double-edged sword for banks. Bank of America’s unrealized losses have surged, but it has also benefited from rising net interest income. Net interest income is the difference between the interest a bank receives on loans and the interest it pays to depositors.

When interest rates are low, as they have been throughout 2021, banks’ net interest income is low. But during periods of rising interest rates, banks enjoy a tailwind because the interest charged on loans adjusts faster than the interest paid on deposits. Bank of America, one of the more interest-rate sensitive banks in the industry, increased its net interest income from $43 billion in 2021 to $57 billion last year.

Banks today are in trouble. Bank of America’s net interest income in the first quarter decreased compared to the same quarter last year. Banks have struggled with rising interest costs on deposits and slowing loan growth as higher charge-offs have tightened lending standards, putting pressure on net interest spreads.

Image source: Bank of America.

Delinquencies and net charge-offs on consumer loans could be a short-term headwind for the bank, but Bank of America executives see light at the end of the tunnel. In the first-quarter earnings call, CFO Alastair Borthwick said delinquency trends were starting to improve, which could lead to charge-offs leveling off over the next quarter or two.

During this period, Bank of America took advantage of the “higher-for-longer” interest rate environment by replacing lower-yielding assets with higher-yielding assets, which should help boost net interest income through the end of this year and early next year.

A KBW analyst recently expressed an optimistic outlook for Bank of America, predicting fourth-quarter net interest income to be 5% higher than previous estimates. Analyst David Konrad said net interest income and growth across other key segments of Bank of America’s business will help close the gap toward its 15% return on common equity (ROTCE) target.

Is it worth buying?

Bank of America stock rose significantly after the Federal Reserve stopped raising interest rates. Despite this rally, the stock is still fairly priced at 1.6 times tangible assets and 13.6 times earnings.

While its business has changed with the U.S. economy and prevailing market conditions, Bank of America has weathered market cycles well. As one of the largest banks in the U.S. with a strong brand and solid balance sheet, the bank is poised to make the most of today’s interest rate environment and perform well as a good stock to buy today.