Source: PaxForex Premium Analytics Portal, Fundamental Insight
Bank of America recently announced its third-quarter results, surpassing expectations on Wall Street. The company reported revenues of $25.2 billion, marking a 3% increase compared to the previous year, while diluted earnings per share saw an 11% rise to reach $0.90.
However, the stock has not performed well in recent times. It has experienced a 22% decline in 2023, which is disappointing when compared to the S&P 500's 8% gain and the 2.5% increase seen in rival JPMorgan Chase's stock.
Nevertheless, it's important to note that Bank of America is the second-largest holding in Warren Buffett's portfolio, indicating a significant vote of confidence in the bank's investment potential.
With this in mind, let's explore four key aspects to understand about Bank of America:
Revenue Sources
Bank of America boasts a diverse range of revenue drivers that warrant the attention of potential investors. Notably, during the third quarter, the consumer banking segment emerged as the leading contributor, comprising 42% of the company's total revenue. This segment serves as the primary provider of banking, credit, and investment solutions to individual customers and small businesses. The remaining revenue during that quarter is distributed across three other pivotal divisions: wealth and investment management, commercial banking, and global markets. In terms of size, Bank of America ranks among the largest financial institutions in the United States, with total assets amounting to $3.2 trillion and a deposit base nearly reaching $1.9 trillion, second only to domestic banking giant JPMorgan Chase.
Economic Influences
The economic landscape in recent years has been anything but typical, marked by factors such as the pandemic, surging inflation, and rapidly escalating interest rates. Bank of America has not been immune to these influences, particularly in the realm of rising interest rates. These higher rates not only dampen the demand for borrowing but also lay the groundwork for an increased rate of credit charge-offs. As a response, the company's provision for credit losses witnessed a substantial 33% year-over-year increase, reaching $1.2 billion. The bank is strategically positioning itself to confront the growing number of defaults. Nevertheless, amidst these challenges, the bank managed to record an impressive nearly 14% rise in net interest income in the first nine months of 2023 when compared to the preceding year. CEO Brian Moynihan remains optimistic, foreseeing a "soft landing" with a trough in the middle of the upcoming year.
Competitive Landscape
Recognizing the intense competition within the banking industry is pivotal for investors. Bank of America contends not only with other major diversified institutions such as JPMorgan Chase, Wells Fargo, and Citigroup but also faces numerous regional banks, credit unions, investment banks, investment management firms, insurance companies, and mortgage originators. Nevertheless, Bank of America harnesses its extensive scale, strong brand recognition, wide array of products and services, and a trusted reputation to sustain its success. Furthermore, the bank's substantial financial resources empower it to continuously invest in technology, ensuring it maintains a leading position within the industry.
Assessing Value
Evaluating a bank's intrinsic value often involves a scrutiny of its book value, computed as the disparity between its assets and liabilities. A valuable metric for this assessment is the price-to-book (P/B) ratio, which compares the stock's market price to its book value per share. A P/B ratio below 1 is commonly perceived as an indication of undervaluation. Currently, Bank of America's P/B multiple stands at 0.77, signifying that the stock is presently trading at a considerable discount. This ratio is also below the historical average of 1.1 over the past five years, potentially presenting an opportune moment for considering an investment in the bank's shares.
As long as the price is below 27.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 25.09
- Take Profit 1: 24.00
- Take Profit 2: 22.00
Alternative scenario:
If the level of 27.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 27.00
- Take Profit 1: 28.00
- Take Profit 2: 29.00
