Investors have been closely monitoring the second-quarter earnings to see how the banking sector has fared in its attempts to recover from a period of turmoil caused by the failure of three large regional banks.
Last month, the Federal Reserve announced that all 23 banks included in the annual stress test weathered a severe recession scenario while continuing to lend to customers and corporations. In this piece, I have discussed why waiting for a better entry point in Bank of America Corporation (BAC) could be prudent.
Yesterday, BAC reported its second-quarter 2023 earnings, with its revenue and EPS topped analyst estimates. For the second quarter, BAC’s EPS and revenue beat the consensus estimates by 4.7% and 1%, respectively.
BAC’s Global Wealth and Investment Management segment’s revenue declined 3.5% year-over-year to $5.24 billion. The segment’s net income fell 15% year-over-year to $978 million due to the global slowdown in the deal-making business. In addition, the bank has set aside $602 million as a provision for credit losses.
The bank has recently gotten embroiled in a scandal involving double-dipping on fees imposed on customers with insufficient funds in their accounts, withholding reward bonuses that were promised to credit card customers, and misappropriating sensitive personal information to open accounts without customers’ knowledge or permission.
Due to its wrongful actions, the bank has been ordered to pay $250 million in fines and refunds, which includes $100 million to be paid to the affected customers, $90 million in penalties to the Consumer Financial Protection Bureau (CFPB), and $60 million in fines to the Office of the Comptroller of the Currency (OCC).
Additionally, BAC’s unrealized losses rose by $7 billion to $106 billion at the end of the second quarter due to its decision to invest heavily in the U.S. government bonds market. The amount is significantly higher than its peers’ unrealized bond market losses.
Over the past month, the stock has gained 5.2% but declined 12% over the past nine months to close the last trading session at $30.70.
Here’s what could influence BAC’s performance in the upcoming months:
Robust Financials
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.
Mixed Analyst Estimates
Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 5.8% and 5.9% year-over-year to $3.37 and $100.53 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 3.4% and 1.2% year-over-year to $3.26 and $99.35 billion, respectively.
Its EPS and revenue for the quarter ending September 30, 2023, are expected to increase 2.3% and 3.2% year-over-year to $0.83 and $25.27 billion, respectively.
Mixed Valuation
In terms of forward non-GAAP P/E, BAC’s 8.75x is 5.4% lower than the 9.25x industry average. Likewise, its 0.88x forward Price/Book is 11.3% lower than the 0.99x industry average.
On the other hand, in terms of forward Price/Sales, BAC’s 2.34x is 1.5% higher than the 2.30x industry average.
Mixed Profitability
BAC’s 11.02% trailing-12-month Return on Common Equity is 1.1% lower than the 11.15% industry average. Likewise, its 0.90% trailing-12-month Return on Total Assets is 20.2% lower than the 1.12% industry average.
On the other hand, the stock’s 30.28% trailing-12-month net income margin is 17% higher than the industry average of 25.87%.
POWR Ratings Reflect Uncertainty
BAC has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. BAC has a C grade for Quality, consistent with its mixed profitability. Its mixed analyst estimates justify its C grade for Sentiment.
It has a C grade for Stability, in sync with its 1.36 beta.
BAC is ranked first out of 10 stocks in the Money Center Banks industry. Click here to access BAC’s Growth, Value, and Momentum ratings.
Bottom Line
Despite a decline in the Global Wealth & Investment Management segment’s earnings and revenue, BAC managed to top Street revenue and earnings estimates. However, the bank is stuck with low-yielding, long-dated securities with significant unrealized losses.
Despite possessing high credit ratings, these low-yielding long-dated securities could affect its earnings as most of these government bonds yield around 2% when the benchmark interest rate is 5%. Moreover, the bank’s profitability might take a hit in the near term as it faces penalties and refunds worth $250 million.
Given the mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.
How Does Bank of America Corporation (BAC) Stack Up Against Its Peers?
BAC has an overall POWR Rating of C, which equates to a Neutral rating. Therefore, you might want to consider investing in foreign bank stocks with an A (Strong Buy) or B (Buy) rating, such as Banco BBVA Argentina S.A. (BBAR), Banco Bilbao Vizcaya Argentaria, S.A. (BBVA), and KB Financial Group Inc. (KB).
What To Do Next?
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BAC shares fell $0.05 (-0.16%) in premarket trading Wednesday. Year-to-date, BAC has declined -6.21%, versus a 19.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
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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