Bank of America | Fundamental Analysis

Bank of America's stock experienced a significant surge after releasing its latest quarterly earnings report. The megabank exceeded expectations, benefiting from a resilient economy and better credit conditions. The stock has risen an impressive 31% this year, reaching its highest point since early 2022.

While the positive news is encouraging, the question remains whether this momentum can sustain the rally in Bank of America's stock. Here’s what investors should consider.

For the second quarter, Bank of America reported earnings per share (EPS) of $0.83, surpassing the average Wall Street forecast of $0.80. The revenue of $25.4 billion also beat the expected $25.2 billion, marking a 1% increase year over year.

A key highlight this quarter was the global wealth and investment management division, which saw a 6% revenue increase from the previous year, driven by higher fees and net asset inflows. Segment client balances hit a record $4 trillion, a 10% rise from Q2 2023, partly due to asset valuation gains this year.

The global markets division also performed strongly, with increased sales and trading activity reflecting a robust financial market. Additionally, a rebound in mergers and acquisitions contributed to higher investment banking fees for the bank this quarter.

In contrast, the consumer banking group presented a mixed picture. Segment revenue and net interest income declined from the previous year, as higher deposit costs offset increased asset yields. However, average loans and leases saw a modest 2% year-over-year growth.

Management highlighted solid operating metrics in consumer banking, including a market share gain. The bank added 278,000 net new checking accounts, achieving 22 consecutive quarters of growth. Higher credit and debit card spending occurred as net charge-offs across the loan portfolio stabilized favorably.

CEO Brian Moynihan addressed these dynamics during the earnings call, noting, "If you consider consumer credit, card charge-offs have leveled out in terms of delinquencies, and we anticipate improvement in the second half."

This optimistic outlook is a positive indicator for both consumer credit conditions and the broader US economy.

On the balance sheet, Bank of America ended the quarter with a standardized Common Equity Tier 1 Capital Ratio of 11.9%, up from 11.3% in Q2 2023. This suggests the bank is well-prepared to handle potential credit losses in case of an unexpected economic downturn.

Additionally, last month, Bank of America announced an 8% increase in its quarterly dividend to $0.26 per share. With this increase, the forward yield on shares is 2.5%.

Bank of America has demonstrated its ability to achieve organic growth despite a challenging macroeconomic environment in recent years.

The bullish outlook for the stock hinges on the potential for the Federal Reserve to implement interest rate cuts amid a declining inflation trend. Such a move would likely boost credit demand and lending activity, providing a new earnings boost for the bank.

Efforts to improve financial efficiency, such as reducing the number of branch locations and investing in digital infrastructure, can ultimately enhance the bank's valuation.

Currently, Bank of America is trading at 13.6 times its projected 2024 earnings per share of $3.22, based on a forward price-to-earnings (P/E) ratio, and 1.3 times its book value. Both of these multiples are lower than their 2022 levels when the stock reached its peak.

One could argue that the bank's long-term prospects are now stronger than ever, suggesting the stock is undervalued with significant upside potential.

As long as economic growth remains stable, Bank of America is likely to continue delivering positive returns for shareholders. For investors with a long-term perspective, this stock could be a valuable addition to a diversified portfolio.