One of the largest American banks – Bank of America BAC – is well positioned to benefit from higher interest rates. This, coupled with the opening of new financial centers, improved digital capabilities and cost reduction efforts, will likely continue to help its finances. However, the overreliance on the performance of capital markets to generate fee income is a concern.
With the Federal Reserve already raising rates three times this year and signaling further such hikes to rein in inflation, BofA’s net interest income (NII) and net interest yield should see decent improvements. . Given aggressive rate hike expectations and increased loan demand, the company expects the NII to improve significantly over the next few quarters.
BAC continues to align its banking centers with customer needs. The bank is on track to open 500 new centers in new cities and redesign 2,500 centers with technology upgrades. These initiatives, along with the success of Zelle and Erica, have allowed the company to improve its digital offerings and sell several products, including mortgages, car loans and credit cards.
Prudent expense management continues to support the company’s finances. Its expense-cutting plan—Project New BAC (launched in 2011)—has improved overall efficiency and saved up to $8.0 billion in operating expenses per year through the end of 2014. It notably incurred $14 billion to $15 billion (on average) in operating expenses on a quarterly basis despite several strategic growth initiatives. While BofA continues to see steady investment in technology, financial centers, growth markets and people across all businesses, spending should remain manageable in the near term.
Analysts also seem optimistic about the company’s prospects. Over the past two months, the Zacks consensus estimate for 2022 earnings has been revised slightly higher.
However, we remain concerned about BofA’s reliance on capital markets to generate fee income. Although the global economic slowdown amid the chaos caused by the coronavirus provided substantial support for the company’s business performance in 2020 and most of 2021, the trend began to reverse, beginning in the fourth quarter. 2021, as markets began to normalize.
Trading revenue (constituting nearly 20% of the company’s total net revenue) saw a year-over-year decline in the first quarter of 2022 despite the unexpected increase in volatility. Due to the volatile nature of the capital markets, the performance of BAC’s trading activities remains uncertain.
Over the past year, shares of this company Zacks Rank No. 3 (Hold) have lost 18.2% against a decline of 19.7% for the industry.
Image source: Zacks Investment Research
The big banks are worth the detour
A few higher ranked large banks are Comedy AMC and M&T Bank MTB. Currently, CMA sports a Zacks Rank #1 (Strong Buy) and MTB sports a Zacks Rank #2 (Buy). You can see the full list of today’s Zacks #1 Rank stocks here.
Over the past year, shares of Comerica have risen 6.2%, while those of M&T Bank have jumped 12.7%.
Over the past 30 days, the Zacks consensus estimate for Comerica’s current-year earnings has been revised up 1.2%, while the same for M&T Bank has risen 2, 4% to the north.
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