Bank of America BAC remains well-poised for growth on decent loan demand, solid deposits and rate cuts. Also, the opening of new financial centers and improving digital capabilities drive its top line. However, investment banking (IB) fee income growth challenges and muted trading revenues are major near-term concerns.

Tailwinds for BAC

Rate Cuts to Aid Net Interest Income: BofA’s net interest income (NII) and net interest yield are expected to witness improvement going forward on the back of rate cuts implemented by the Federal Reserve. Currently, both are under pressure, given the drastic increase in funding costs.

The bank accumulated billions of dollars-worth long-dated Treasuries and mortgage bonds at low rates during the pandemic. Given the Fed’s aggressive stance on raising interest rates since early 2022, the company has registered significant paper losses, thus hampering NII growth.

NII and net interest yield recorded a year-over-year decline during the first nine months of 2024. Nevertheless, NII recorded a five-year (ended 2023) compound annual growth rate (CAGR) of 3.4%. Likewise, net interest yield expanded to 2.08% in 2023 from 1.96% in 2022.

Management anticipates NII in the fourth quarter of 2024 to rise sequentially and expand further next year. While we project NII to fall 1.7% in 2024, the metric is expected to grow 5.8% in 2025 and 4.1% in 2026. The net interest yield is projected to be 1.95%, 2.05% and 2.15% in 2024, 2025 and 2026, respectively.

Expansion Initiatives: BAC continues to align its banking centers in accordance with its client requirements by opening financial centers in new and existing markets. It intends to grow its financial center network by introducing more than 165 new centers.

Moreover, the bank remains committed to offering modern and state-of-the-art financial centers via its ongoing renovation and modernization project.

Over the past three years, the company has been renovating and upgrading its existing financial centers throughout the country. By the end of 2023, more than 2,500 centers had been renovated, and offices and meeting spaces were built for clients to engage with financial specialists and ensure a consistent and modern experience across all centers.

These initiatives, along with the success of the person-to-person money transfer system Zelle and the digital financial assistant Erica, will allow the company to enhance its digital offerings, and cross-sell numerous products including mortgages, auto loans and credit cards.

Solid Deposits & Loans: BofA emphasizes the acquisition of the industry’s best deposit franchise to strengthen the loan portfolio. Despite a tough operating backdrop, deposits and loan balances have remained strong over the past years.

As of Sept. 30, 2024, the company’s net loans and leases were $1.06 trillion, improving modestly from the prior year quarter. While the tough macroeconomic scenario acts as a headwind, loan demand is projected to remain decent in the quarters ahead. We project net loans and leases to increase by 3.5% in 2024.

Roadblocks for BofA

Muted Trading Revenues: Bank of America’s excessive reliance on the capital markets performance to generate fee income remains a concern. Though trading revenues (constituting more than 15% of the company’s total net revenues) improved in 2023 and in the first nine months of 2024, the performance of the trading business remains uncertain due to the volatile nature of the capital markets. We project total sales and trading revenues to increase 12% in 2024, 2.1% in 2025 and 3.7% in 2026.

Weak Investment Banking Business: Bank of America has significantly enjoyed global deal-making traction in the past. Yet, in 2022 and 2023, the company’s IB business did not perform well, given the poor performance of the underwriting and the advisory businesses (global deal-making subdued primarily due to the Russia-Ukraine conflict, recessionary fears and 40-year high inflation).
 
The company recorded a fall in total IB fees in 2023 on industry-wide muted performance. Though IB fees increased year over year in the first nine months of 2024, solid improvement in the business will take time. We expect IB fees to rise 25.9% in 2024 and, thereafter, the growth to normalize.

Zacks Rank & Price Performance of BAC

Year to date, shares of BofA have gained 36.2% compared with the industry's rise of 41.8%. Currently, BAC carries a Zacks Rank #3 (Hold).

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Other Investment Banks Worth a Look

A couple of top-ranked bank stocks are BGC Group, Inc. BGC and Morgan Stanley MS.
 
The Zacks Consensus Estimate for BGC has been revised 6.5% upward for 2024 over the past month. The stock price has increased 20.8% over the past six months. BGC currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Earnings estimates for MS have been revised marginally upward for the current year over the past week. In the past six months, MS’ shares have risen 32.3%. Presently, Morgan Stanely carries a Zacks Rank #2 (Buy).

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