Bank of America’s Q4: Mixed Earnings, Great Value (NYSE:BAC)

Bank of America Corporation (NYSE:BAC) just released its fourth quarter earnings. The release was a miss on revenue but a beat on adjusted earnings per share (“EPS”). Expectations were muted heading into the release. Wall Street expected Bank of America to do $23.73 billion in revenue and $0.64 in adjusted EPS. The actual results were mixed in comparison to these expectations: revenue beat, but sales and earnings both declined on a year-over-year basis.

Bank of America stock made significant gains in the months prior to its fourth quarter earnings release coming out. After inflation unexpectedly ticked down to 3.2% in the third quarter, investors started bidding BAC up, expecting its unrealized loss to get smaller. As the fourth quarter release showed, the unrealized loss did improve, but the company’s earnings declined.

Throughout 2023, BAC stock traded poorly despite its earnings releases generally showing rising earnings. One reason for that was the fact that investors were left with a lot of concerns after several banks collapsed in the Spring of that year. Early in 2023, financial institutions like Silicon Valley Bank and First Republic suffered bank runs when their depositors withdrew their money, seeking better returns in treasury bills. Unfortunately, those same treasury bills caused the banks’ liquidity to decline, leaving them unable to pay their depositors the money they were owed. This resulted in several of them failing.

Investors became concerned about unrealized losses on treasuries because of the outsized role such losses played in SVB and First Republic collapsing. Bank of America had by far the largest unrealized loss of all U.S. banks at the time. Coming in at over $100 billion, it was enough to cut BAC’s book value by over a third! Even though all of BAC’s 2023 earnings releases showed positive earnings growth, with many of them beating expectations, the perceived risk stemming from the unrealized loss was enough to get many investors heading for the exits. At one point, BAC stock fell all the way to $25, at which point its P/E ratio was less than eight.

Today, unrealized losses appear to be less of a problem for Bank of America than many investors thought they were. At the last Fed meeting, Jerome Powell said that he expected 75 BPS worth of rate hikes in 2024. If those cuts materialize, then we should see Bank of America’s unrealized losses decline, as lower yields mean higher prices. After Powell’s statement, some unexpectedly bad news surfaced, as fourth quarter inflation ticked up to 3.4%, higher than what was expected. That put a damper in BAC’s late 2023 rally, but as the bank’s fourth quarter earnings release showed, its liquidity situation is improving.

When I last wrote about Bank of America, I rated the stock a ‘buy’ on the grounds that it was cheap despite it growing and being highly profitable. Today, the stock is not as cheap as it once was, trading at 9.7 times earnings according to Seeking Alpha Quant. Nevertheless, the company just put out a solid earnings release and affirmed its bullish outlook for the remainder of the year. In the following paragraphs, I’ll explain why I remain bullish on Bank of America stock, despite the fact that it is nowhere near as cheap as it was when I last wrote about it.

Earnings Recap

Bank of America’s fourth quarter and full year earnings release was fairly strong, boasting metrics such as:

• $22 billion in revenue, down 10% (a miss).

• $13.9 billion in net interest income, down 3.5%.

• $4.2 billion in pretax, pre-provision income.

• $5.9 billion in net income.

• $0.70 in diluted EPS (a beat).

• $1.1 billion in provisions for credit losses (“PCLs”), up $12 million.

• A 26.8% net margin.

• A 4.3% return on equity.

• A $102 billion unrealized loss on held-to-maturity (“HTM”) securities.

Some of these numbers were disappointing. The analyst consensus for revenue was $23.73 billion, which was a bit too optimistic considering what we actually got in the Q4 release. On the other hand, the bottom line beat expectations by a significant margin, so it wasn’t all bad news from Bank of America in the fourth quarter.

One unexpected bright spot in the earnings release was capital markets (i.e., investment banking). This segment saw 7% year-over-year growth rate in fee-related revenue. In the prior quarter, and in most 2022 quarters, investment banking fees declined. Deal making has been at a standstill since 2022, and that trend has shown no signs of ending. In light of this, it was a pleasant surprise to see Bank of America growing its i-banking fees amid a tough market environment.

Valuation

Having received a new earnings release from Bank of America, we can now turn to the valuation.

Seeking Alpha Quant has the following multiples on file for Bank of America:

• P/E: 9.3.

• Price/sales: 2.76.

• Forward P/E: 10.10.

• Price/book: 1.02.

Those numbers are outdated in light of the Q4 earnings release, but we can calculate new ones using the data that came out today.

Below, you can see BAC’s revenue numbers and share counts, which we can use to translate the revenue into per share amounts.

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As for earnings and book value, BAC conveniently provides those on a per share basis. So, we can proceed to adding up the TTM totals.

Click to enlarge

Using these updated figures, we can arrive at new P/E, P/sales and price/book ratios for Bank of America:

• P/E: 9.92.

• Price/sales: 2.66.

• Price/book: 0.99.

As you can see, the multiples (apart from price/book) went up as a result of the fourth quarter earnings just released. Nevertheless, Bank of America stock is still quite cheap, despite the recent rally.

It should be noted that if held to maturity debt securities were measured at fair value instead of amortized cost, then BAC’s book value would be $102 billion lower than it is reported at. Using the numbers based on fair value, the price/book ratio would be more like 1.5. That’s not as “dirt cheap” as the multiples based on reported earnings indicate, but it’s still cheaper than most stocks these days. On the whole, I consider Bank of America a buy based on its valuation.

Risks and Challenges

As we’ve seen, Bank of America just put out yet another strong quarter that was close to what analysts had expected. The stock is cheap, the company is growing, and the margins are healthy; what’s not to love? For my money, there is indeed much here to love: BAC is the most heavily weighted stock in my portfolio. Nevertheless, there are major risks and challenges for investors to keep in mind here:

• Rate hikes. Although high interest rates benefit banks on the profitability front, they harm banks like BAC that hold large amounts of treasury securities on the liquidity front. The reason for this is that higher rates cause bonds to decline in price, which reduces banks’ liquidity. In the fourth quarter, Bank of America benefitted from this phenomenon, as treasury yields went down in the quarter, causing the bank’s unrealized loss to shrink by about $33 billion. However, if inflation stays hot and the Fed starts hiking rates, this situation will reverse, and BAC’s unrealized losses will increase again. That will likely cause people to start selling the stock.

• Waning margins. If interest rates fall in the year ahead, then we’d expect Bank of America’s margins to take a hit. As a bank, it charges more interest when the Fed’s policy rates and treasury yields are high, than when they were low. This tends to have a positive effect on its revenue and earnings, as was seen in 2023. If yields start falling in 2024, then that will help BAC from a liquidity perspective, but harm it from a profitability perspective, as the bank will have to start charging lower interest rates. Unless the yield curve un-inverts, that will cause the bank’s net interest income to decline.

The risks and challenges above are serious enough to be worth keeping in mind. It’s also worth keeping in mind the stock price: Bank of America stock was close to a 52 week high when it closed trading Yesterday. I would not expect the stock to make the kinds of big gains that it made in the closing weeks of 2023 again this year. Nevertheless, Bank of America Corporation still has good long term prospects, which makes its stock worth holding for the long run.