Bank of America Corp

BAC Details

Bank of America Corp (NYSE: BAC) is amongst the leading financial institutions of the world which   serves its  consumers, SMEs  with a  full range of banking, investing, asset management, and other financial and risk management products and services.

Q2FY21 Result Performance (For the Quarter Ended 30 June 2021)

• BAC has recorded a 4% decline in its revenue, net of interest expense to $21.5 billion in Q2FY21 with net interest income falling by 6% to $10.2 billion mainly due to lower interest rates.
• Despite higher consumer and wealth management revenues, non-interest income declined by 2% to $11.2 billion due to lower sales and trading revenue and the non-availability of a $704 million gain that was reported in the pcp.
• It posted a net income of $9.2 billion that contains provision for credit losses benefit of $1.6 billion as well as positive tax adjustment related to the revaluation of UK deferred tax assets of $2.0 billion.
• The balance sheet remains strong with a common equity tier 1 (CET1) ratio of 11.5% and the average global liquidity sources rose to $1.1T.

Key Data (Source: Company Reports)

Dividend

The board of directors, on 21 July 2021, declared a regular quarterly cash dividend on the common stock of $0.21 per share, a growth of 17% from the prior quarter. The dividend will be paid on September 24, 2021. Further, the board of directors has declared a regular quarterly cash dividend of $1.75 per share on the 7% Cumulative Redeemable Preferred Stock, Series B that will be paid on October 25, 2021.

Key Risks

As a financial service holding company, it is exposed to regulatory risk as it is subject to regulatory capital rules, including Basel 3, issued by U.S. banking regulators. Further, credit risk along with liquidity risk, operational and reputational risks are some other potential risks.

Outlook

BAC has experienced good growth in consumer products post easing of the pandemic-related restrictions which enabled it to conduct face-to-face meetings with customers which in turn, drove household growth in Wealth Management and augmented prospect calling in Commercial Banking.

The balance sheet remains strong driven by its performance in the most recent stress tests that showed  significant excess capital. Its common equity tier 1 (CET1) ratio stood at 11.5% and the average global liquidity sources rose to $1.1T. Besides, it has returned around $6 billion in Q2FY21 through common dividends and share repurchases. Further, it expects to return a higher amount going ahead.

Valuation Methodology: Price/Book Value Per Share Multiple Based Relative Valuation (Illustrative)

Stock Recommendation

The stock has been valued using a Price/BVPS multiple-based illustrative relative valuation and  a target price that reflects a fall of low double-digit (in % terms) has arrived. A slight discount has been applied to Price/BVPS Multiple (NTM) (Peer Median), considering the decline in revenue and net interest margin in Q2FY21 and lower interest rates. The stock has made a 52-week low and high of $22.95 and $43.49, respectively.

For the purposes of relative valuation, peers like Wells Fargo & Co (WFC.N), Citigroup Inc (C.N), among others have been considered.

Considering the aforementioned factors and the associated business risks, we advise the investors to liquidate the stock.

Thus, we give a “Sell” rating on the stock at the current market price of $41.40 per share (10:40 am GMT-4, Eastern Daylight Time, USA) on 2^nd September 2021. 

Technical Chart:

Source: REFINITIV, Purple Color Line Reflects RSI (14-Period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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