Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors are still optimistic about the more positive market and economic conditions in 2023. However, the reality is that the circumstances that led to a bear market in 2022 haven't really changed much and may stay with us for some time.
But some stocks, such as Bank of America Corp. actually ended the year on a high note, relatively speaking. According to S&P Global Market Intelligence, Bank of America stock is up 6.39% in the second half of 2022. Can the bank continue that growth in 2023? Can we say the worst is over?
Bank of America, the second-largest U.S. bank, has outperformed average bank stocks in the second half of 2022. The KBW Nasdaq Bank Index, which tracks the performance of the largest banks, was virtually unchanged in the second half of the year. For all of 2022, the index fell 21.4%, while Bank of America fell slightly more, down 23.8% for the calendar year 2022.
So what drove the outperformance in the second half of the year? Rising interest rates allowed the bank to generate high levels of net interest income on loans, which offset losses in other areas of its business, particularly investment banking and asset management. In the most recent, third quarter, interest income was $13.8 billion, up 24% YoY. That accounted for more than half of the $24.5 billion in total revenue.
Two other factors played a major role in Bank of America's performance growth in the second half of last year. First, credit activity remained strong, as average loan balances increased 11% YoY to $1.0 trillion in Q3r. The second key indicator was credit quality. Bank of America was able to reduce its Q3 net charge-off ratio from the previous quarter and keep it at its Q3 2021 level. This, in turn, led to lower provisions for credit losses compared to other banks.
Bank of America has benefited from more than a decade of striving to diversify its loan mix. In 2009, 67% of its loans were consumer loans. In 2022, 56% of its loans will be commercial loans and 44% will be consumer loans. This has helped reduce the bank's credit risk.
With interest rates expected to rise further and the possibility of an economic downturn, 2023 could be another challenging year. But Bank of America has a good chance of maintaining its positive momentum, given high interest rates, expected loan growth, and good credit quality.
Another advantage Bank of America has is its low deposit rate, the amount by which it has to increase interest payments on deposits when interest rates fall. As of the end of the third quarter, Bank of America had a lower cost of deposits and raised its deposit rate less frequently than all other major banks except Wells Fargo.
This means that the less interest paid on deposits, the more the bank can maximize net interest income. Bank of America is able to do this because it has been able to increase deposits through a stable, growing customer base and a wide range of products and services.
Overall, the worst should be over for Bank of America. This year is still fraught with uncertainty, but the bank's stock should ultimately perform better in 2023.
As long as the price is above 31.50, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 33.88
- Take Profit 1: 35.50
- Take Profit 2: 38.00
Alternative scenario:
If the level of 31.50 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 31.50
- Take Profit 1: 30.00
- Take Profit 2: 28.00
