Although the S&P 500 is down 1% over the past six months, Bank of America’s stock price has fallen further to $48.40, losing shareholders 7.7% of their capital. This might have investors contemplating their next move.
Is now the time to buy Bank of America, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Bank of America Not Exciting?
Despite the more favorable entry price, we don't have much confidence in Bank of America. Here are three reasons why BAC doesn't excite us and a stock we'd rather own.
1. Net Interest Income Points to Soft Demand
Our experience and research show the market cares primarily about a bank’s net interest income growth as one-time fees are considered a lower-quality and non-recurring revenue source.
Bank of America’s net interest income has grown at a 6.7% annualized rate over the last five years, worse than the broader banking industry. Its growth was driven by an increase in its outstanding loans as its net interest margin, which represents how much a bank earns in relation to its outstanding loan book, was flat throughout that period.
2. Low Net Interest Margin Reveals Weak Loan Book Profitability
Net interest margin (NIM) represents the unit economics of a bank by measuring the profitability of its interest-bearing assets relative to its interest-bearing liabilities. It's a fundamental metric that investors use to assess lending premiums and returns.
Over the past two years, we can see that Bank of America’s net interest margin averaged a poor 2%, indicating the company has weak loan book economics.
3. Projected TBVPS Growth Is Slim
Tangible book value per share (TBVPS) growth is driven by a bank’s ability to earn more than its cost of capital through lending activities while maintaining a strong balance sheet.
Over the next 12 months, Consensus estimates call for Bank of America’s TBVPS to grow by 6.3% to $30.68.
Final Judgment
Bank of America’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 1.2× forward P/B (or $48.40 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward an all-weather company that owns household favorite Taco Bell.
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