Valued at US$260 billion by market cap, Bank of America (NYSE: BAC) is among the largest banks in the world. While bank stocks are cyclical, they remain an integral part of the global economy. Typically, bank stocks derive outsized profits during periods of economic expansion and trail the broader markets during bear markets.
In the last 20 years, Bank of America stock has returned just 26% to shareholders after adjusting for dividends. In this period, the S&P 500 index has returned more than 500% to investors. Today, BAC stock trades 40% below all-time highs due to rising interest rates and a tepid lending environment. But the pullback allows shareholders to buy the dip and benefit from a high dividend yield of almost 3%.
How did Bank of America perform in Q4 of 2023?
In the last four quarters, Bank of America reported an adjusted net income of US$29.3 billion, or US$3.42 per share, an increase of 7% year over year. Its return on common equity stood at 15%, which is quite good given an uncertain macro backdrop.
Bank of America attributed its earnings growth to strong customer activity, diversified line of businesses, and operating leverage. Moreover, its revenue for 2023 rose by 5% year over year due to a 9% growth in net interest income and strong asset management fees.
Its operating leverage stood at 170 basis points, which means Bank of America improved earnings at a faster pace compared to revenue due to its focus on cost optimization.
With US$1.924 trillion in total deposits, Bank of America has grown this metric by 35% in the last four years, allowing it to enjoy an industry-leading market share while outpacing peers in this period.
Bank of America is a diversified financial heavyweight and among the most recognizable brands in the world, allowing it to attract deposits and provide loans easily. Moreover, as is the case with several other big banks, BAC benefits from high switching costs as customers are unlikely to change their bank accounts for a competing product or service.
What’s next for Bank of America stock?
There is a good chance that the Federal Reserve might lower interest rates by three times in 2024, which should act as a massive tailwind for BAC and other bank stocks. Lower interest rates should drive demand for loans in the near term, leading to higher net interest income and falling default rates.
Further, quantitative easing measures should drive consumer spending higher as the economy gains pace in the next 12 months.
While Bank of America has underperformed the S&P 500 by a sizeable margin, it trades at a compelling valuation. Analysts tracking BAC stock expect adjusted earnings per share to narrow from $3.18 per share in 2023 to $2.93 per share in 2024. But earnings are then forecast at $3.19 per share in 2025. So, priced at 10 times forward earnings, BAC stock is really cheap.
Investors can consider purchasing BAC stock due to the company’s massive scale and market-leading position. Analysts remain bullish and expect shares to surge by 10% in the next 12 months.
