Buy Bank of America Stock on This Dip. The Good Outweighs the Bad.

Written by Amanda

The market’s response to Bank of America‘s (NYSE: BAC) first-quarter results was decidedly bearish — and understandably so. Net interest income was down, while charge-offs on soured loans were up. The numbers confirmed investors’ worst fears. Although they’ve bounced back a bit in the meantime, from peak to trough, BofA shares fell more than 10% from their early April high.

Before jumping on the bearish bandwagon, however, you might want to take a step back and look at the bigger picture. This recent setback is actually a buying opportunity.

Bank of America’s problems are already peaking

Don’t misunderstand. Bank of America’s certainly got plenty to figure out here. Charge-offs nearly doubled year over year, from $807 million in Q1 2023 to $1.5 billion this time around. Net interest income slipped by 3% to $14 billion as well, with its costs to compensate depositors edging up a bit more than the interest rates it’s charging its borrowers did. Its own portfolio of “held-to-maturity” bonds lost $109 billion worth of market value (nearly 20% of the portfolio’s previously reported value) thanks to rising interest rates. These are all clear problems.

There’s nothing about these impasses that’s insurmountable, though … or even new. BofA has been here before. That’s because the banking business is predictably cyclical. Wise investors understand that the good times reliably follow the bad.

The ebb and flow of interest rates is perhaps the most important component of banks’ business cycle. They rise and fall as merited with respect to inflation, which is often a function of economic strength. But, because the economy perpetually strengthens and weakens, interest rates reliably rise and fall.

So what? We’re likely nearer the end of a wave of rising interest rates than the beginning of one. The Federal Reserve has said it intended rate cuts for this year, in fact, which should ultimately drag overall market-based interest rates lower with them. This will lower borrowers’ costs, bolstering demand for new loans. In this vein, Bank of America’s CFO Alastair Borthwick explained during Tuesday’s earnings conference call: “We continue to expect that Q2 will be the low point for NII [net interest income] and we expect the back half of 2024 to grow.”

The bank’s soaring charge-offs also come with a critical footnote. That is, credit card delinquencies and defaults are responsible for the lion’s share of these write-offs. Sky-high inflation and record-high credit card interest rates, however, are creating unique credit usage circumstances that aren’t likely to worsen — or even linger — going forward.

Where BofA is already winning

In the meantime, there are several things going very well for BofA right now.

Take the company’s corporate fundraising business as an example. Investment banking fees were up 35% year over year last quarter. This could be an early glimpse of a brewing rebound for overall capital markets.

Business lending revenue was up as well, despite higher interest rates. Corporate deposits grew from $493 billion in Q1 of last year to $526 billion for Q1 2024, suggesting companies not only have more liquidity, but remain in a position to access it quickly.

Bank of America’s investor services businesses are firing on all cylinders too. Its Global Wealth and Investment Management arm’s revenue grew 5% in Q1, hitting a record-breaking $5.6 billion. Brokerage and advisory client balances reached a new record of nearly $4 trillion as well during the first quarter of this year. Some of that improvement is the result of market gains. A sizable piece of that growth, however, is simply the result of more wealthy customers bringing their money to BofA to invest. The bank’s brokerage arm, Merrill Lynch, netted 6,500 new client households last quarter.

Meanwhile, ordinary people continue to trust Bank of America with more of their money as well. Although total consumer deposits slipped 7% to $952 billion during Q1, that may be largely the result of more money being spent on must-haves like groceries or rent. The company added (net) 245,000 new consumer checking accounts last quarter, pushing its total up to a record of 36.9 million. This crowd may also simply be putting more of their money into the stock market instead of into bank accounts. Consumer/retail investment assets grew 29% to a record-breaking $456 billion in Q1.

More to like about Bank of America stock than not

Is it the most compelling stock you can possibly own? No. Even within the financial sector, you’re likely to find growth prospects that are at least equally compelling, if not more so.

If you’re on the fence specifically about stepping into BofA stock, though — or if you know you need some dividend-paying exposure to the banking industry in your portfolio — this pullback is a prime opportunity.

Bank of America is one of the banking business’s best all-around and most proven names. It’s also big enough to hold on to its commanding share of all of its money-related businesses. This unfair advantage means it’s well-positioned to capitalize on the next economic growth wave, which may well already be underway. You’d be stepping into this opportunity while the stock’s priced at only 11.2 times this year’s expected per-share earnings, and while the dividend yield’s standing at a healthy 2.8%.

Should you invest $1,000 in Bank of America right now?

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.

Buy Bank of America Stock on This Dip. The Good Outweighs the Bad. was originally published by The Motley Fool

Source: finance.yahoo.com

About the author


Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai