In 2016, Bank of America endured a bumpy road as litigation risk dragged the BOA stock down, along with the Federal Reserve’s zero interest-rate policy (ZIRP). But with all legal issues resolved and the ZIRP coming to an end, shares doubled over the past year.
However, the stock’s strong surge, according to analysts, will not end there and is likely to happen once more. A number of factors will contribute to the stock doubling again.
Trump’s bullish bank policies
When Donald Trump won as US president in the elections in November 2016, the financial sector primarily benefitted from his victory. Stocks from banks soared, and BOA was one of those who had a remarkable increase.
This is due to the fact that President Trump's policies are highly favorable for the bank sector. These policies include regulatory reform, corporate tax cuts and an infrastructure stimulus package.
Regulatory reform should considerably slash costs and free the bank from Dodd Frank regulations that have kept the banks restrained. Meanwhile, a corporate tax cut would be advantageous to BOA just like any other corporation. Finally, the major bank could benefit from the financing of any new infrastructure projects the President approves.
Current valuation: further opportunity, security
Brian Moynihan, the big bank’s CEO, and his team have done a remarkable job turning BOA around. Asset quality continues to consolidate and the lender posted record capital and liquidity levels.
Nevertheless, BOA currently trades for just 1.3 times tangible book. The bank, which is the second largest banking company in the US by assets, traditionally trades for closer to two times tangible book value.
With it currently trading fundamentally at tangible book value, the upside potential is vast at 85%. In turn, this significantly increases the margin of safety as well.
The US central bank will eventually have to speed up rate hikes as inflation has started to rear its head. This event had chances the Fed will increase rates at the March meeting have rocketed considerably since Trump took office.
The Fed is likely to hike 25 basis points later in the month, and it will not be the last rate increase for the year, in which all this bodes well for BOA.
Improving fundamentals, dividend growth prospects
BOA is trading for a PEG ratio of 1.52 and a forward P/E ratio of 11.81. Additionally, the bank's forward P/E of 11.81 is one of the lowest among the major banks. These developments give a nice tailwind for the bank’s stock.
Furthermore, at present, BOA shares’ dividend is at $0.30, giving a yield of 1.18% per share. With the legal bills all paid up and rising profits, the bank can now shift its focus on increasing the dividend and share repurchases.
The bank is also put at an advantage of this rising rate environment, enabling it to earn even bigger profits on the difference between the cost of funding and lending rates. This is otherwise referred to as the net interest margin (NIM).
With the size of the BOA’s balance sheet, a tiny change in rates can have a big impact on the lender’s bottom line. As a matter of fact, BOA claimed in its own disclosure that it would earn an additional $3.7 billion for every 1% increase in interest rates.
One of the three foundations of economic growth is having a healthy banking system. With all these factors, analysts are labeling BOA as bullish.
Additionally, the bank has presented several areas of improvement on a fundamental basis: currently, the risk/reward equation favors long trades, and there is a substantial margin of safety.
However, one thing traders should preferably let things cool down before piling in, as there remain some issues. One of which is that the BOA stock’s technical status that may hold the stock back in the short term. The stock is currently overbought with an RSI of over 70 after the notable rally on Wednesday.
A possible pullback should provide an opportunity to pick up shares before the expected next leg-up in the stock. Analysts are saying it may be a long shot that BOA will double again over the next year, but is likely. All the components of a double are being presented already, and are merely awaiting execution.
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