Source: PaxForex Premium Analytics Portal, Fundamental Insight
In the past months, Bank of America's stock has surged, recording a remarkable 44% gain since November. This rise is largely attributed to the Federal Reserve's halt on interest rate hikes, providing a favorable environment for bank stocks. However, persistent inflationary pressures have led to a reassessment of interest rate cut expectations for 2024.
Given these shifts, is Bank of America a suitable addition to your investment portfolio? One driving factor behind the stock's ascent is the Federal Reserve's interest rate policy. Following its final interest rate hike in July, setting the federal funds rate to an upper range of 5.5%, the Fed maintained rates in December. Additionally, the committee projected three rate cuts for 2024.
This outlook prompted increased investment in interest rate-sensitive sectors like banking, with markets anticipating further rate reductions. At one point earlier this year, futures markets even priced in up to six rate cuts throughout the year.
However, elevated inflation levels have tempered these expectations. Despite a temporary decline, the year-over-year change in the core Consumer Price Index (CPI) has remained stubbornly high, hovering around 3.8% to 3.9%, surpassing the Fed's 2% inflation target. Consequently, market sentiment has adjusted, now anticipating only two interest rate cuts by year-end.
Investors in Bank of America may be troubled by the bank's mounting unrealized losses, which have surged from $13.7 billion to $112.8 billion since the Federal Reserve initiated interest rate hikes in the first quarter of 2022. These losses stem from the Fed's unprecedented pace of rate increases and represent potential losses if the bank were compelled to sell these securities today.
Concerns over shifting interest rate forecasts, potentially impacting net interest income or discomfort with significant unrealized losses could prompt investors to consider divesting Bank of America stock. However, there are grounds for optimism regarding the bank's long-term prospects.
Most of Bank of America's unrealized losses are associated with its held-to-maturity portfolio, indicating the intention to retain these bonds until maturity. Thus, the bank may not need to realize losses unless compelled to sell these securities to raise capital urgently.
Despite potential deviations from plans, Bank of America's expansive and diversified deposit base mitigates risks associated with scenarios like bank runs. Over the past year, the bank has witnessed a modest increase in deposits, reinforcing its stability.
Furthermore, Bank of America boasts a high-caliber customer base, providing a steady deposit foundation and positioning it favorably to navigate potential economic downturns. Notably, the bank's credit card borrowers and auto borrowers exhibit strong credit profiles.
During the bank's April earnings call, CFO Alastair Borthwick expressed optimism regarding trends in delinquencies and anticipated stabilization in net charge-offs over the coming quarters.
Monitoring the bank's net interest income (NII) remains crucial, given the 3% decline witnessed in the first quarter due to diminishing benefits from higher interest rates. Nonetheless, strategic asset reallocations towards higher-yielding assets should bolster NII in the long run, as indicated by Borthwick.
Bank of America's disciplined capital management practices, resilience across economic cycles, and reasonable valuation metrics make it an attractive investment opportunity. Despite near-term challenges, the bank's ability to weather uncertainties positions it to deliver favorable outcomes for long-term shareholders, warranting a continued hold and even a buy recommendation for current investors.
As long as the price is above 34.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 37.79
- Take Profit 1: 40.00
- Take Profit 2: 44.00
Alternative scenario:
If the level of 34.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 34.00
- Take Profit 1: 32.00
- Take Profit 2: 30.00
