BAC: Solid Loan And Deposit Trends Will Balance Industry Competition Ahead

Key Takeaways

• Investment in digital engagement and AI is poised to boost customer retention and increase revenue over time.
  
• Strategic asset and interest rate management is expected to enhance net interest income, supporting earnings growth.
  
• Economic volatility, policy uncertainties, and increased litigation costs threaten revenue growth and could impact net margins and earnings through credit quality and competition for deposits.

Catalysts

Through its subsidiaries, provides various financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide.

• Bank of America's continued investment in digital engagement and AI-driven efficiencies is expected to enhance customer acquisition and retention, potentially increasing revenue and net margins over time.
  
• The company's focus on growing commercial loans and adding new clients, particularly in sectors like international markets and healthcare, suggests potential future revenue growth as these investments mature.
  
• Bank of America's ability to repurchase shares, supported by strong capital levels, could drive an increase in earnings per share, providing a catalyst for stock valuation uplift.
  
• The diversification and strengthening of the credit portfolio, with a focus on high-quality commercial and consumer loans, is expected to maintain asset quality and reduce credit losses, positively impacting net income.
  
• Strategic actions around asset repricing and interest rate management, including fixed-rate asset re-pricing and cash flow hedge benefits, could improve net interest income, supporting future earnings growth.

Bank of America Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of America's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.0% today to 26.9% in 3 years time.
• Analysts expect earnings to reach $32.9 billion (and earnings per share of $4.74) by about September 2028, up from $26.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.8x on those 2028 earnings, down from 14.0x today. This future PE is greater than the current PE for the US Banks industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 3.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.26%, as per the Simply Wall St company report.

Bank of America Future Earnings Per Share Growth

Risks

• Market volatility and potential changes in the economy could affect the quality of credit portfolios, capital, and liquidity, impacting net margins and earnings.
  
• Reduced GDP growth forecasts and no expected rate cuts in 2025 may affect consumer spending dynamics, influencing future revenue growth potential and earnings.
  
• Tariffs and policy uncertainties create risks around loan demand and investment sentiment within commercial banking, potentially affecting revenue growth.
  
• Litigation costs from recent decisions increase noninterest expenses, potentially negatively impacting net margins and earnings.
  
• Increased competition for deposits might necessitate higher interest rates paid, which could impact net interest income and earnings.

Valuation

• The analysts have a consensus price target of $53.521 for Bank of America based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $59.0, and the most bearish reporting a price target of just $46.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $122.0 billion, earnings will come to $32.9 billion, and it would be trading on a PE ratio of 13.8x, assuming you use a discount rate of 8.3%.
• Given the current share price of $50.29, the analyst price target of $53.52 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.