Buy or Hold for August: Bank of America (BAC) vs. Wells Fargo & Company (WFC)

In this piece, I have evaluated the fundamentals of Bank of America Corporation (BAC) and Wells Fargo & Company (WFC) to determine whether they are worth buying now.

The banking industry has faced several challenges since the beginning of the year. The Federal Reserve’s aggressive interest rate hikes were one of the primary reasons for the failure of three regional banks. The FDIC reported that U.S. banks lost $472 billion in deposits in the first quarter.

However, the banking industry is showing signs of stability lately. BAC and WFC recently reported their second-quarter financials, delivering higher-than-expected revenue and earnings. These two banks were amongst the 23 that passed the Federal Reserve’s annual stress test, signifying they could weather a severe recession scenario while continuing to lend to customers and corporations.

For the last quarter, BAC’s EPS was 4.9% above analyst estimates, while its revenue beat the consensus estimate by 1%. WFC’s EPS topped analyst estimates by 8.9%, while its revenue came 2% above the consensus estimate.

BAC’s Chairman and CEO Brian Moynihan said, “We delivered one of the strongest quarters and first-half net income periods in the company’s history. Continued organic client growth and client activity across our businesses complimented beneficial impacts of higher interest rates and produced an 11% increase in revenue.”

“All businesses performed well, and we saw improved market shares, particularly in our Sales and Trading and Investment Banking businesses. A strong balance sheet and ample liquidity allowed us to continue investments in our franchise to drive long-term value for stakeholders,” he added.

Commenting on its second-quarter performance, WFC’s CEO Charlie Scharf said, “We reported solid results in the second quarter, with net income of $4.9 billion and revenue of $20.5 billion. Our strong net interest income continued to benefit from higher interest rates, and we remained focused on controlling expenses. As expected, net loan charge-offs increased from the first quarter.”

“Consumer charge-offs continued to deteriorate modestly. Commercial charge-offs increased driven by a small number of borrowers in Commercial Banking, with little signs of systemic weakness across the portfolio, and higher losses in commercial real estate, primarily in the office portfolio,” he added.

WFC had a $949 million increase in the allowance for credit losses, primarily for commercial real estate office loans and higher credit card loan balances.

BAC expects its net interest income to exceed $57 billion for fiscal 2023. On the other hand, WFC hiked its fiscal 2023 guidance for net interest income. It expects NII to rise 14% this year, up from the previous forecast of a 10% year-over-year rise.

When it comes to price performance, WFC is the clear winner. WFC’s stock has gained 9.4% in price year-to-date compared to BAC’s 5.2% decline. In addition, WFC’s stock has gained 2.9% over the past year, higher than BAC’s 6.6% decline.

Let’s dive deeper to find out which one of these stocks is a better investment:

Recent Financial Results

BAC’s net interest income for the second quarter ended June 30, 2023, increased 13.8% year-over-year to $14.16 billion. Its return on average assets came in at 0.94%, compared to 0.79% in the year-ago period. The company’s net income applicable to common shareholders rose 19.7% year-over-year to $7.10 billion. Its EPS came in at $0.88, representing an increase of 20.5% year-over-year.

For the second quarter ended June 30, 2023, WFC’s total revenue increased 20.5% year-over-year to $20.53 billion. Its net income rose 57.2% year-over-year to $4.94 billion. Its EPS came in at $1.25, representing an increase of 66.7% year-over-year. Its ROE came in at 11.4%, compared to 7.2% in the prior-year quarter.

In addition, its CET1 ratio came in at 10.7%, compared to 10.4% in the year-ago period. Also, its net interest income rose 29% year-over-year to $13.16 billion.

Expected Financial Performance

Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 6.3% and 6.3% year-over-year to $3.39 and $100.93 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 3.2% and 0.6% year-over-year to $3.28 and $100.30 billion, respectively. Its EPS and revenue for the quarter ending September 30, 2023, are expected to increase 0.1% and 2.6% year-over-year to $0.81 and $25.13 billion, respectively.

For fiscal 2023, WFC’s EPS and revenue are expected to increase 8.7% and 10% year-over-year to $4.84 and $81.16 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 1.1% and 2.4% year-over-year to $4.79 and $79.23 billion, respectively.

Its revenue for the quarter ending September 30, 2023, is expected to increase 2.7% year-over-year to $20.03 billion. Its EPS for the same quarter is expected to decline 5.1% year-over-year to $1.23.

Profitability

BAC’s trailing-12-month revenue is 1.27 times what WFC generates. BAC’s Return on Equity and net income margin of 10.78% and 30.88% are higher than WFC’s 8.72% and 21.40%, respectively. On the other hand, WFC’s Return on Assets of 1.68% is higher than BAC’s 1.39%.

Valuation

In terms of forward non-GAAP PEG, WFC is currently trading at 0.70x, 40.2% lower than BAC’s 1.17x. WFC’s trailing-12-month Price/Sales ratio of 2.25x is 14.4% lower than BAC’s 2.63x. On the other hand, BAC’s trailing-12-month Price/Book ratio of 0.98x is 4.9% lower than WFC’s 1.03x.

POWR Ratings

BAC has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Similarly, WFC has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. BAC and WFC have a C grade for Quality, in sync with their mixed profitability.

Of the 10 stocks in the Money Center Banks industry, BAC is ranked first, while WFC is ranked #2 in the same industry.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, Stability, and Sentiment. Click here to view BAC ratings. Get all the ratings of WFC here.

The Winner

Due to the high-interest rates, BAC and WFC are expected to generate higher net interest income. Both banks suffered a decline in the deal-making segment, but the segment’s prospects are likely to turn around in the second half of the year.

However, both banks have increased their provision for credit losses arising from bad loans. Moreover, BAC’s unrealized bond market losses rose by $7 billion to $106 billion at the end of the second quarter. Meanwhile, WFC expects higher loan losses from commercial real estate office loans.

Although these banks are expected to post higher profits in the upcoming quarters, the risk of higher loan losses exists amid the uncertain macroeconomic environment. Given the mixed analyst estimates and profitability, waiting for better entry points in these stocks could be wise.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. While there are currently limited investment options in the banking sector, check all the top-rated stocks in the Consumer Financial Services industry here.

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

3 Stocks to DOUBLE This Year >

BAC shares rose $0.04 (+0.13%) in premarket trading Friday. Year-to-date, BAC has declined -4.00%, versus a 18.26% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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