Bank of America Earnings: Investment Banking and Asset Management Keep Fees Strong, but Charge-Offs Rise

Key Morningstar Metrics for Bank of America

• Fair Value Estimate: $38.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Bank of America’s Earnings

Bank of America BAC reported first-quarter adjusted earnings per share of $0.83, higher than the FactSet consensus estimate of $0.76. Bank results in the quarter were impacted by an FDIC special assessment charge of $0.7 billion for uninsured deposits of certain failed banks, which reduced earnings by $0.07 per share. After adjusting for the charge, the numbers resulted in a return on tangible equity of 13.8%. We do not plan to materially change our $38 fair value estimate for Bank of America as we fully incorporate the results.

The bank’s shares have recently pared back after rallying by around 50% from their October 2023 lows, as the market has lost its enthusiasm around the Federal Reserve cutting interest rates in 2024 due to hotter-than-expected inflation readings. The consensus prediction has gone from the year seeing six rate cuts to there being two or three. We agree that a higher-for-longer interest rate scenario is bad for Bank of America in the short term, but the downside should be limited in the long term. If the market overreacts to expectations for interest rates over the short term, investors should watch this stock.

Investors have been penalizing Bank of America in the past year for its exposure to longer-duration securities while interest rates were rising. These assets weighed on the company’s net interest income, as they were stuck on the book while earning lower yields. Lower short-term interest rates should assuage concerns about the bank’s long-duration exposure and unrealized losses. We think the bank’s balance sheet is relatively well-positioned for interest rate cuts, and NII should hold up reasonably well. The stock is trading around 10% below our fair value estimate, and we think it could outperform other money-center banks in the next few quarters as interest rates lower.