Bank of America (BAC) is a bank and financial holding company which, through its subsidiaries, provides banking, investing, asset management and other financial and risk management products and services. The company's segments include: Consumer Banking, Global Wealth and Investment Management, Global Banking and Global Markets.
BAC has struggled in recent years along with the rest of the big banks as the persistent low interest rate environment has punished the ability of financials to expand net interest margins and profitability. Many of the banks have leaned heavily on their trading and investment banking lines of business to augment their bottom lines in the current environment.
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The sector took another hit last year when the coronavirus pandemic hit and much of the lending market dried up. Banks reined in lending activity in order to protect their financial health as loan defaults and forbearance programs hit large segments of the population.
Since then, the macro environment has improved. Interest rates are nearly 100 basis points above their 2020 lows, offering hope that banks to begin loaning money more profitably. Trillions of dollars of government stimulus is also supporting borrowers ability to afford new loans and the financial sector remains well-capitalized.
Cyclicals were rallying during the last part of 2020 and early part of 2021 before the reflation trade fizzled out. With growth rates peaking and concerns rising over debt levels and the lack of a plan to deal with them, investors have shifted back to growth sectors, such as tech and consumer discretionary, and away from sectors, such as industrials, financials and materials.
BAC's second quarter earnings report this week should offer signs of optimism. With the latest round of capital stress tests in the rear view mirror, the company can focus on lifting the quarterly dividend once again and consider another round of share buybacks. Valuations for the sector still look good, dividend growth potential is high and there's still plenty of upside if cyclicals can come back into favor.
This report for Bank of America is through July 2021.
You can find the full report on Bank of America below, but here are a few of the highlights.
- Like other big banks, Bank of America easily passed the latest round of capital stress tests and has a clear path to raise its dividend.
- There are concerns about Bank of America's profitability and financial health, but valuations look attractive.
- Bank of America is expected to generate 3% annualized revenue growth over the next 5 years.
- This analysis concludes that Bank of America stock is about 6% undervalued.
The 12-month consensus price target is about 7% above its current price offering only modest upside potential.
In short term, the share price could rise around 4% with a positive Q2 earnings report this week.
- Bank of America has a relatively modest dividend yield of 1.8%. It's attempting to become a dividend growth stock again and has been steadily lifting its quarterly payment since it was slashed to $0.01 per share post-financial crisis.