The stock of Bank of America Corporation (NYSE:BAC) has made a remarkable comeback from its lows in July.
Despite this, the current negative volatility has nearly cost BofA most of its gains from August. Investors who missed the lows in July appear to have an excellent opportunity to increase their position now.
BofA should surpass Q3’s easier comparisons, thanks in part to the strong expansion of net interest income (NII). Bank of America should be upgraded from a Hold to a Buy due to these factors and what we think will be an easier environment for investment banking and wealth management in the future (given the market bottom).
Investors should consider increasing their positions in light of the impending downward volatility.
Strong NII at Bank of America Helped in Halting the Decline in Fee Income
Following Q1’s 13.5% rise, Bank of America reported an increase of 21.6% in NII. Notably, it has also assisted in containing the notable decline in non-interest income that was observed as revenue from wealth management and investment banking shrank more noticeably.
Since management predicted even more robust growth in NII for Q3 and Q4, BofA’s well-diversified operating model is crucial in maintaining its earnings quality and visibility resilience.
Alastair Borthwick, CFO, stated:
“In comparison to Q2, NII in Q3 increased by at least $900 million and perhaps by $1 billion. In the fourth quarter, we anticipate it will sequentially increase at a quicker rate once more. Given our spending control, we also believe that the majority of those NII improvements will benefit shareholders’ bottom lines.” (Earnings call for BofA Q2 2022)
As a result, we are confident that Bank of America will experience a strong profits recovery from Q3 as it overcomes difficult comps and a sizable reserve release. As a result, it should corroborate our hypothesis about a persistent July bottom and encourage investors to buy Bank of America.
Investors Should Expect Better Days Ahead
According to bullish consensus predictions, Bank of America’s revenue and EPS growth should peak in Q2 and Q3 before reversing dramatically through fiscal 2023. Analysts on the call questioned whether BofA significantly impacted its revenue and earnings visibility from the growing macro challenges.
But management reassured investors that it still sees a healthy loan book with solid credit quality and high consumer spending. As a result, even though the capital markets have been noticeably weaker over the last two quarters, BofA’s well-diversified businesses continue to experience underlying solid growth.
The Valuation Is Still Reasonable
BofA traded closer to two standard deviations below its 10-year average at its July lows. It’s important to remember that buying support has been strong in that area for the past 10 years.
We are sure that Bank of America’s valuation is still fair because the market has bottomed out for the longer term, even though it didn’t reach that level at its most recent bottom. Notably, BofA is still deviating from the 10-year average by at least one standard deviation.
Furthermore, throughout the previous four quarters, BofA has been active in repurchasing shares. In Q2, it reported a TTM buyback yield of 7.4%, barely below the 7.6% of Q1. The substantial decline from its January 2022 highs leads us to hypothesize that management sees value in the company’s stock.
Is it Better to Buy, Sell, or Hold Stock?
As seen above, Bank of America has made a strong comeback from its lows in July, and we are sure this trend will continue over the coming months. Despite this, the price movement near the highs of August suggests that the market is likely still absorbing its recent gains.
However, we are optimistic that BofA’s earnings visibility will continue to increase, supporting a re-rating of the business. Investors should therefore take advantage of the current downward volatility to increase exposure.
Featured Image: Megapixl @Wolterk
