Bank of America (NYSE: BAC) recently announced its Q2 earnings that fell short of some estimates while other metrics stayed strong. The company’s Q2 GAAP EPS stood at $0.73, missing estimates by $0.02. At the same time, its revenue grew 5.7% YoY to $22.7B, missing estimates by $90M. However, some of the company’s results have been seen as bullish signals, as the stock rallied 1.2% after it posted earnings. Notably, BAC’s net interest income grew 22% to $12.4B, partially driven by higher interest rates. While on the other hand, non-interest income shrank by $989M due to a deterioration in capital markets and lower investment banking fees, among other factors. Another positive for the company was that its average deposits were up 7% by $123B for a $2.0T total. Average loans and lease balances were also strong as they increased by $107B or 12% to $1.0T.
Bank of America also strengthened its balance sheet compared to previous years. It noted that it is in a solid position to weather an economic downturn, such as in the case of a recession. Its recently released investor presentation states that it’s more balanced and has less inherent risk. Some notable examples of how the company achieved this include a reduced concentration of consumer loans, less exposure to unsecured consumer credit and home equity loans, and less concentration in construction loans. It also made a notable pivot towards offering more Global Wealth Investment Management (GWIM) loans, which is credit provided to wealthy and high-net-worth individuals. Its GWIM loans rose from $100B in 4Q’09 to $222B in 2Q’22, while its home equity loans shrank from $154B to $27B over the same period. Other risky lines of credit were also reduced, such as consumer credit card lending, which shrank from $161B to $84B. Overall, the bank stated that it has a significantly lower expected credit loss if a severe recession does come to fruition, with a nine-quarter stress-tested loss of $53B, or 5.2%, compared with $104B or 10% in 4Q’09.
The Bull Case for Bank of America
BAC is trading near the bottom of its 52-week range and has had a historically low P/E ratio for the last two years. In Q4’21, the company reached its peak share price of $44.02 with an EPS of $3.57 and a P/E ratio of 12.33. Today its share price at the time of writing is $32.42 with only a slightly lower EPS by -$0.06, or $3.51, and a far lower P/E ratio of 9.19, making it undervalued on this relative basis.
Bank of America trades significantly below the MarketBeat consensus price target of $43.39, leaving a 45.34% upside. Bulls could interpret this fact as a further sign that the company is undervalued at its current levels.
Bank of America Vs. JPMorgan Chase
JPMorgan Chase (NYSE: JPM) is one of Bank of America’s main competitors. JPM has a higher market capitalization than BAC at 331.24B compared with 259.83B. This smaller market capitalization is part of why BAC has provided higher returns to investors over the last ten years. BAC returned 377.69%, while JPM returned 309.83%. While BAC has provided a higher yield, JPM’s dividend is significantly higher at $4.00 compared with $0.84. On the other hand, BAC’s 5-year dividend growth rate is higher than JPM’s as it stands at 22.87% compared with 15.33%.
In terms of valuation, the banks are neck and neck. BAC’s FWD P/E ratio is 10.02, while JPM’s is 10.07. The Price/Sales ratio is similar; BAC is at 2.92, and JPM stands at 2.79. One notable difference, though, is that BAC’s FWD EPS growth is higher at 26.08% compared with JPM’s 12.25%.
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