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Bank of America and rate hikes

Summary (from latest annual report – 2016)

  • Total equity  : 266.84 billion USD
  • Market Cap is 238.7 billion USD ( last price of the stock is 23.98 USD)
  • Bank of America Corporation is a bank holding and a financial holding company. Through its subsidiaries, the Company provides banking and non-banking financial services and products throughout the United States and in selected international markets
  • Equity of total company increased from 256.2 billion USD in 2015 to 266.84 billion in 2016
  • Company has 30.79 billion USD in cash on account (from latest annual report  2016 year)
  • In 2016 company had 216.82 billion USD long-term debt, short -term debt was 23.94 billion USD                                                                                                                                                            (In 2015 company had 236.76 billion USD long-term debt , short-term debt was 28.09 billion USD)
  • BAC balance sheet has become stronger in 2016 (In latest annual report - total equity increased to 266.84 billion  USD from 256.2 billion USD in 2015, total debt was 240.76 billion USD in 2016)
  • Company's revenue increased in 2016 to 83.7 billion USD from 82.5 billion in 2015
  • Net income in 2016 was 17.96 billion USD, Net income in 2015 was 15.88 billion USD
  • In 2016 company paid 4.19 billion usd dividend to its shareholders

 

Opinion about the company

Fundamentally it is a good company and in the future we can expect its growth (Total debt is 240.76 billion USD, the company has 30.79 billion USD in cash on account, ROE is around 7 %).

 

Analysts maintain a buy rating on Bank of America for the long-term

Bank of America is an American multinational banking and financial services corporation headquartered in Charlotte, North Carolina. It is the second largest bank holding company in the United States by assets. Bank of America provides its products and services through operating 5,100 banking centers, 16,300 ATMs, call centers, and online and mobile banking platforms. Its Consumer Real Estate Services segment offers consumer real estate products comprising fixed and adjustable-rate first-lien mortgage loans for home purchase and refinancing needs, home equity lines of credit, and home equity loans. The bank's 2008 acquisition of Merrill Lynch made Bank of America the world's largest wealth management corporation and a major player in the investment banking market. Bank of America generates 90% of its revenues in its domestic market and continues to buy businesses in the U.S. The core of Bank of America's strategy is to be the number one bank in its domestic market. Before 1998, today’s Bank of America was known as Nations Bank. In the year 1998, this Nations Bank made an acquisition deal with Bank America. This acquisition deal was the largest bank acquisition of that period. After this acquisition of Bank America by Nations Bank, the combined entity got the name, Bank of America. Although the deal was technically an acquisition, it was provided the structure of a Merger.

According to analysts Bank of America is one of the top blue chip top picks for 2017. The reasons extend beyond just rising interest rates but extend fat into many other fundamental improvements. Company's revenue increased in 2016 to 83.7 billion USD from 82.5 billion in 2015. Net income was $17.9 billion , or $1.50 per diluted share in 2016 compared to $15.8 billion , or $1.31 per diluted share in 2015 . The results for 2016 compared to 2015 were driven by higher net interest income and lower noninterest expense, partially offset by a decline in noninterest income and higher provision for credit losses. Bank of America produced a strong set of numbers for the first quarter of 2017. Revenues of $22.2 billion in the quarter came in ahead of the consensus $21.6 billion, up 7% YOY. EPS of $0.41 was also much better than the expected $0.35. Not only did the bank perform very solidly on the institutional client side of the business, which was somewhat expected given overall strength in the market, it also outperformed in consumer banking and asset management. Bank of America plans to increase its dividend payout ratio to and use the rest of excess capital to buy back shares.

The narrative around bank stocks right now revolves around rising rates. Holding all else equal, if rates go higher, so too will bank profits. And if bank profits head higher, so too should bank stock prices. This is because banks generate revenue by originating loans and then holding them on their balance sheets -the higher the interest rate they're able to get on their loans, the more money they make. According to some analysts, Bank of America's share price performance will be held hostage by oil prices and OPEC's policy in the near term. If oil prices increase to high-$50s/low-$60s, inflation expectations will rise again, prompting a steeper yield curve. With interest rates rising into the future, it can only help net interest income longer-term. As of Apr 25, 2017, the consensus forecast amongst 33 polled investment analysts covering Bank of America Corp advises that the company will outperform the market.

 

Technical analysis

The two most recent rate hikes from the Federal Reserve have made for boom times for Bank of America. The price has advanced from 12 USD to 25.79 USD in the very short period. When we look at one year chart we can see that price of BAC is moving in "uptrend". As long the price is above this trend line and $22 this stock is in the "BUY" zone and there is no indication of the trend reversal. If the price falls on the trendline and if we get "bullish" confirmation candle it would be a very good entry point. Trend line represents very strong support level, if the price breaks this trend line( and $22) it would be a very strong "SELL" signal and we have an open way to $20 ( this is also very strong support level). If the price jumps above $25 (short term resistance level) that would be a confirmation of "BULLISH" trend and open way to $27 and after that $30.

 

 

Conclusion - Holding all else equal, if rates go higher, price of the stock will rise

My opinion is that Bank of America is well-positioned to outperform peers and the stock has still room for growth. The narrative around bank stocks right now revolves around rising rates. Holding all else equal, if rates go higher, so too will bank profits. And if bank profits head higher, so too should bank stock prices. The Federal Reserve’s decision to raise interest rates will boost revenue throughout the bank industry, especially at Bank of America.

The Federal Reserve has begun to move its policy interest rate target faster. Fed officials moved the target federal funds range in the middle of December 2016 and then made another move in the middle of March 2017. After the March meeting, the target range was 0.75 percent to 1.00 percent. The "forward guidance" provided by Fed officials is for two more moves to take place this year. The projections for the federal funds rate released by the Federal Open Market Committee is as follows: the average rate projected for 2017 is 1.4 percent; for 2018 is 2.1 percent, and for 2019 it is 3.0 percent (all of this should have a positive impact on Bank of America). Bank of America needs more rate hikes for a further re-rating and, in the near term, the stock is likely to remain a hostage to the Treasury yields. Technically speaking as long the price is above this trend line and $22 this stock is in the "BUY" zone and there is no indication of the trend reversal. More important to long-term investors is certain key metrics that tell us Bank of America continues to steadily improve the efficiency and quality of its operations.

 

 

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