Yahoo Finance Bank of America Corp (BAC) Stock Waits for Boost From D.C. Tailwinds
The story at Bank of America Corp (NYSE:BAC) looks somewhat simple — and even logical — at the moment. BAC stock grinded slowly higher coming out of the financial crisis, as BofA earnings were pressured by regulatory penalties and low interest rates.
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The surprise election of Donald Trump in the U.S. presidential election in November promised both higher inflation and lower regulation. BAC stock responded to that win by soaring, climbing 50% between early November and post-financial crisis highs reached in early March.
But since then, BAC stock has basically traded sideways, even after a solid rally over the past couple of weeks. The most obvious reason: the tailwinds that were supposed to benefit BofA simply haven’t arrived yet.
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That’s OK, though. It does mean that BAC stock requires more patience than shareholders might have thought earlier this year. Those tailwinds remain intact, and with BAC stock still rather cheap and BofA doing a fine job managing risk, there’s more than enough reason to wait.
BofA Waits For Rates
Record-low interest rates that have held since the financial crisis have been a problem for BofA. Lower rates limit the spread between rates paid to depositors and those received from borrowers. It’s not just a Bank of America problem: rivals like JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc (NYSE:C) also are suffering.
The three banks are among the top five holdings of the iShares Dow Jones US Financial Svc. (ETF) (NYSEARCA:IYG), which focuses on the U.S. financial services industry. Since Sept. 11, as BAC shares gained 11%, the ETF managed only to do half as well, adding 5.9%. JPM shares gained 7.7% while C stock added 9.2% in the same period.
At some point, those rates should normalize. But it may take some patience. U.S. Treasury yields have pulled back, hitting a post-election low earlier this month. Futures trading points to low odds of a Fed rate hike, though the argument is that at some point those rates have to rise.
But the well-known “widowmaker trade” in Japanese bonds provides instructive history. For years, traders and hedge funds bet that rates simply would have to rise. They still haven’t. So there might be a case that betting on BAC stock will simply wind up with a similarly long, and difficult, wait.
Can Lower Regulation Help BAC Stock?
Meanwhile, BAC stock investors also thought a Trump Administration would result in lighter regulation on the industry. Trump himself targeted the Dodd-Frank law almost immediately after taking office.
Bulls in BAC and other financials argued that lighter regulation, in combination with the long-awaited end to punitive settlements relating to housing bubble-era behavior, would jump start profit growth. A Bloomberg analysis in August suggested that big banks would see as much as a 22% profit increase as a result of deregulation. Morgan Stanley (NYSE:MS) was named in that analysis as the big winner, with BofA in the middle of the pack.
But there, too, 2017 has been a disappointment. The Trump agenda largely has stalled out. Corporate tax reform still has hope, but little progress has been made. The Consumer Financial Protection Bureau, a key target of the GOP, remains intact.
The news isn’t all bad for BofA, however. The Department of Labor fiduciary rule, enacted under the Obama Administration, has withstood challenges. It has also, contrary to projections, turned out to be a benefit for BofA unit Merrill Lynch and other asset managers. (One relatively unknown beneficiary of that trend: Blucora Inc (NASDAQ:BCOR), which owns broker-dealer HD Vest.)
And the Trump Administration isn’t over. Regulatory reform may well come. Some version of corporate tax reform should be passed. Obviously, BAC bulls expected more from the first nine months of 2017. But here, too, some patience should be advised.
BAC Stock Still Is Cheap
The broader point is more important, however. It’s not as if BAC stock is pricing in the benefits of lower regulation and higher interest rates. The stock still trades at under 14x 2017 EPS estimates, and under 12x 2018 numbers. From an asset standpoint, BAC trades right at book value as well.
This isn’t a riskless play, by any means. There are dangers relative to macro factors, and credit card default rates are rising. But BofA credit metrics still look solid, and the rest of the market has macro risk of its own.
BAC stock still looks as if it’s pricing in what is happening now — at best — and not the potential benefits coming down the line. And that means, even with the stock back near the high end of a seven-month range, BAC is too cheap.
As is, BofA shares offer a nearly 2% dividend, a solid valuation, and growth. That’s enough reason to buy BAC stock. The tailwinds that haven’t shown up? They will eventually. But until they do, BAC remains a buy.
As of this writing, Vince Martin has no positions in any securities mentioned.
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