Since late October of last year, American bank (NYSE: PAC) The index was on a tear, surging 58% after the Federal Reserve signaled a pause in its rate hikes. The stock has rallied significantly as investors price in the pause and potential rate cuts later this year and next, which could help ease pressure on the bank, whose loan portfolio is suffering from large unrealized losses.
However, it is still unclear where interest rates will be at the end of this year or next. Entering the year, markets had priced in as many as six interest rate cuts. Those expectations Now down to two pieces.In light of the stock’s recent rise, would it be wise for investors to buy now? Here are some things you might want to think about first.
Bank of America’s ballooning unrealized losses have caught the attention of investors.
Bank of America’s total assets are more than $2.5 trillion, making it the second-largest bank in the United States, after… C. B. Morgan Chase. Its sheer size makes it a giant, and it has maintained its position over time as one of the largest banks in the United States.
Banks are simple companies that accept deposits and make loans to customers. They make money from the difference between the interest rate charged on loans and the interest paid to customers on their deposits.
This business model makes the industry sensitive to interest rate fluctuations, and Bank of America’s sensitivity is evident by looking at its loan portfolio. These mounting unrealized losses have been a source of concern among some investors as the Federal Reserve raises interest rates at the fastest pace in decades. Since the Fed began raising interest rates in 2022, the bank’s unrealized losses have grown from $14 billion to $113 billion.
Unrealized losses represent the losses Bank of America would incur if it had to sell its securities in today’s market. This does not necessarily mean that the bank is in trouble as long as it is able to hold those securities until maturity. However, the run on deposits at Silicon Valley Bank (a subsidiary of… SVB Financial) Last year, the global financial crisis forced the bank to raise capital and realize huge losses on Treasuries, which would have been worse if the Federal Reserve Banks had not intervened.
As one of the largest and most well-known banks in the United States, Bank of America has a well-diversified deposit base, with 37 million consumer checking accounts and about $2 trillion in deposits from individuals and businesses. That gives it a stable foundation for its business, making it less vulnerable to the kind of bank runs that Silicon Valley and other regional banks experienced last year.
Bank of America’s net interest income could continue to rise.
The high interest rate environment is a double-edged sword for banks. Although Bank of America’s unrealized losses swelled, it also benefited from growth in net interest income. Net interest income represents the difference between the interest a bank charges on its loans and the interest it pays to depositors.
When interest rates are low, as they have been throughout 2021, a bank’s net interest income is low. However, during periods of rising interest rates, banks enjoy a tailwind as the interest charged on loans adjusts faster than the interest paid on deposits. As one of the most interest-rate-sensitive banks in the industry, Bank of America increased net interest income from $43 billion in 2021 to $57 billion last year.
Today, banks live in a state of ambiguity. In the first quarter, Bank of America’s net interest income decreased compared to the same quarter last year. The bank faced difficulties in dealing with rising interest costs on deposits and slowing loan growth as banks tightened lending standards amid high write-off rates, which put pressure on the net interest spread.
Delinquencies and net charges on consumer loans could be short-term headwinds for the bank, but Bank of America’s management sees a light at the end of the tunnel. During the first quarter earnings call, CFO Alistair Borthwick said delinquency trends were starting to improve and that this would likely lead to a flattening of charge collections over the next quarter or two.
During this period, Bank of America has taken advantage of a prolonged higher interest rate environment by replacing lower-yielding assets with higher-yielding ones, which should help grow net interest income late this year into early next year.
A KBW analyst recently expressed optimism about Bank of America, expecting net interest income in the fourth quarter to be 5% above his previous estimate. Analyst David Conrad said net interest income and growth in other key parts of Bank of America’s business will help close the gap toward its goal of a 15% return on tangible common equity (ROTCE).
Is it a buy?
Bank of America shares have risen significantly since the Federal Reserve paused interest rate hikes. Despite the rise, the stock remains reasonably priced at 1.6 times its tangible price. Book value And 13.6 times earnings.
While its business fluctuates with the US economy and prevailing market conditions, Bank of America has managed to handle market cycles excellently. As one of the largest banks in the US with a strong brand and strong balance sheet, the bank is poised to perform well while making the most of the current interest rate environment and is an excellent stock to buy today.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. SVB Financial provides credit and banking services to The Motley Fool. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and JPMorgan Chase. At The Motley Fool Disclosure policy.
Are Bank of America shares a buy? Originally published by The Motley Fool