Should you buy Bank of America stock?

For the reason that finish of October final yr Financial institution of America (BAC 1.32%) was on a tear, surging 58%, when the Federal Reserve introduced a pause in its rate of interest hike marketing campaign. Shares rose sharply as traders priced in a pause and potential rate of interest cuts later this yr and subsequent yr that might assist ease strain on the financial institution, whose mortgage portfolio has vital unrealized losses.

Nonetheless, it stays unclear the place rates of interest shall be on the finish of this yr or subsequent yr. Heading into the yr, markets are pricing in as many as six rate of interest cuts. Now these expectations have been diminished to 2 cuts. Given the inventory’s current rally, is it clever for traders to purchase now? Listed here are some belongings you need to take into consideration first.

Financial institution of America’s mounting unrealized losses have caught the eye of traders

Financial institution of America has greater than $2.5 trillion in belongings, making it the second largest financial institution within the U.S. behind solely JPMorgan Chase. Its sheer measurement makes it a large, and over time it has turn out to be one of many largest banks in america

Banks are easy companies that settle for deposits and make loans to prospects. They earn cash on the distinction between the rate of interest on loans and the curiosity paid to prospects on their deposits.

This enterprise mannequin makes the trade delicate to fluctuations in rates of interest, and Financial institution of America’s sensitivity is clear whenever you have a look at its mortgage portfolio. These mounting unrealized losses have frightened some traders because the Federal Reserve raised rates of interest at its quickest tempo in many years. For the reason that Fed started elevating charges in 2022, the financial institution’s unrealized losses have grown from $14 billion to $113 billion.

Unrealized losses symbolize the losses that Financial institution of America would incur if it had been pressured to promote its securities available in the market as we speak. This doesn’t essentially imply that the financial institution is in hassle so long as it will probably maintain these securities till maturity. Nonetheless, deposits in Silicon Valley Financial institution (subsidiary Monetary SVB) final yr pressured the financial institution to boost capital and understand big losses on its treasuries that might have been worse had the federal authorities not intervened.

As one of many largest and most recognizable banks in america, Financial institution of America has a well-diversified deposit base with 37 million shopper checking accounts and almost $2 trillion in retail and company deposits. That provides him a strong basis for his enterprise, making it much less weak to financial institution raids just like the one at Silicon Valley Financial institution and different regional banks final yr.

BofA’s web curiosity revenue might proceed to develop

A better rate of interest atmosphere is a double-edged sword for banks. Whereas Financial institution of America’s unrealized losses widened, it additionally benefited from larger web curiosity revenue. Web curiosity revenue is the distinction between the curiosity a financial institution fees on its loans and the curiosity it pays out to depositors.

When rates of interest are low, as they’ve been all through 2021, the financial institution’s web curiosity revenue is low. Nonetheless, during times of rising rates of interest, banks get pleasure from a tailwind as curiosity on loans adjusts sooner than curiosity on deposits. As probably the most curiosity rate-sensitive banks within the trade, Financial institution of America grew web curiosity revenue from $43 billion in 2021 to $57 billion final yr.

Immediately, banks are in limbo. Within the first quarter, Financial institution of America’s web curiosity revenue fell in comparison with the identical quarter final yr. The financial institution struggled with rising curiosity prices on deposits and slowing mortgage development as banks tightened lending requirements amid rising foreclosures, placing strain on its web curiosity unfold.

Picture supply: Financial institution of America.

Delinquencies and web write-offs on shopper loans may very well be a short-term headwind for the financial institution, however Financial institution of America administration sees gentle on the finish of the tunnel. Throughout the first quarter earnings name, CFO Alastair Borthwick stated that delinquency tendencies had been beginning to enhance and that this was prone to result in a leveling off of foreclosures over the following quarter or two.

Throughout that point, Financial institution of America has taken benefit of the “higher-for-longer” rate of interest atmosphere by swapping low-yielding belongings for higher-yielding ones, which ought to assist it increase web curiosity revenue later this yr and early subsequent.

One KBW analyst just lately expressed optimism about Financial institution of America and predicted that its web curiosity revenue within the fourth quarter can be 5% above the earlier estimate. Analyst David Conrad stated web curiosity revenue and development in different key areas of Financial institution of America’s enterprise will assist shut the hole on its aim of a 15% return on tangible frequent fairness (ROTCE).

Is that this a purchase order?

Financial institution of America shares rose sharply after the Federal Reserve suspended rate of interest hikes. Regardless of​​​​this rally, the inventory remains to be reasonably priced at 1.6 instances tangible guide worth and 13.6 instances earnings.

Though its enterprise adjustments with the US financial system and prevailing market situations, Financial institution of America does an ideal job of navigating market cycles. As one of many largest US banks with a robust model and robust steadiness sheet, the financial institution is poised for achievement because it makes essentially the most of as we speak’s rate of interest atmosphere and is a good inventory to purchase as we speak.