Can Bank of America Stock Recover To $50? No, But It's Still A Buy

Elevator Pitch

My investment rating for Bank of America's (NYSE:BAC) stock is a Buy.

I analyzed Bank of America's stock price outlook and earnings growth drivers for 2022 with my earlier December 22, 2021 write-up. My attention turns to the impact of the banking crisis on BAC and the likelihood of a share price recovery for Bank of America in the latest article.

My analysis leads me to the conclusion that there is a high likelihood of a significant recovery in Bank of America's stock price, taking into account the effects of the banking crisis and the bank's long term prospects. Returning to a price level of $50 or above in the near term will be an uphill task, but my $38.50 target price implies that BAC's shares have the potential to go up by as much as +29% which justifies a Buy rating.

How Was Bank of America Impacted By The Banking Crisis?

The banking crisis came to the forefront with the failure of Silicon Valley Bank in early March this year, but Bank of America hasn't been adversely affected to a large extent. Specifically, BAC's deposits outflows were insignificant and the bank's cost of consumer deposits only rose marginally in the recent quarter.

In fact, BAC revealed that it had gained deposit share during the worst of the banking crisis. At its most recent Q1 2023 earnings briefing on April 18, 2023, Bank of America noted that it witnessed "noticeable flight to safety" in March which allowed it to "benefit from some customer flows."

In the next section, I highlight several key metrics which support the thesis that the banking crisis has had a limited negative impact on BAC.

BAC Stock Key Metrics

There are positive read-throughs relating to key metrics disclosed by Bank of America as part of its recently announced Q1 2023 financial results.

BAC's total deposits only declined by a mere -1% QoQ from $1,930 billion as of December 31, 2022 to $1,910 billion at the end of the first quarter of 2023, as indicated in its Q1 2023 earnings presentation. More significantly, Bank of America's deposits as of March 31, 2023 were +34% higher than the bank's pre-COVID deposits at the end of 2019 as per the company's disclosures at its Q1 2023 earnings call. In contrast, the US banking industry's deposits grew by a relatively lower +31% between end-Q4 2019 and end-Q1 2023, which implied that BAC had gained deposit share in recent times. These deposit-related metrics are consistent with Bank of America's management commentary at the most recent quarterly results briefing which I referred to in the preceding section.

Separately, Bank of America didn't have to pay a whole lot more to retain consumer deposits in the recent quarter. BAC highlighted in the bank's Q1 2023 results presentation that the rate paid on consumer deposits only increased slightly from 6 bps (basis points) in Q4 2022 to 12 bps for Q1 2023. There are good reasons why Bank of America has been able to keep its cost of consumer deposits at a reasonably low rate. Approximately two-thirds of BAC's consumer & small business clients have had banking relationships with the company for more than a decade. Also, around 85% of Bank of America's customers for its consumer & small business segment utilize multiple banking products and services from BAC, so there are high client switching costs.

In summary, the analysis presented above suggests that BAC's cost of consumer deposits and deposit flows haven't been affected by the banking crisis in a meaningful way.

What Are Current Analyst Price Targets?

The sell-side's target prices for Bank of America indicate that there is limited downside for BAC's shares at its current price level.

Bank of America's stock last traded at $29.76 at the end of the April 24, 2023 trading day. The current mean analyst price target of $36.13 translates into a +21% capital appreciation potential for BAC, while the lowest target price on the Street is $28.00 which is only equivalent to a -6% downside.

The Wall Street analysts' current price targets for BAC suggest that Bank of America's shares are now attractively priced.

Can Bank of America Stock Recover To $50 In 2023?

In my view, Bank of America's shares are poised for a recovery, but I think a return to price levels of $50 or above will be challenging.

BAC's stock price has declined by -9% from $32.56 as of March 8, 2023 (when negative news flow on Silicon Valley Bank started to emerge) to $29.76 as of April 24, 2023, even though the negative impact of the banking crisis on Bank of America wasn't as bad as feared. As Bank of America continues to report stable deposit figures and a low cost of consumer deposits in subsequent quarters of the year, it is reasonable to assume that BAC's share price can at least recover to February 2023 price levels in the mid or high thirties.

The last time Bank of America's shares traded at $50 or higher was during intra-day trading on February 10, 2022. With a potential pause on rate hikes on the cards and a weaker economic outlook, it is unlikely that BAC's stock price can go up to $50 again anytime soon. Even the most bullish sell-side analyst covering Bank of America's shares has only assigned a $47.00 price target to the stock, which is the highest target price on the Street but still below $50.

My 2023 target price for Bank of America is $38.50, which assumes that BAC's consensus forward next twelve months' normalized P/E multiple re-rates from 9.2 times (source: S&P Capital IQ data) to its 10-year historical average of 11.9 times. A reversion to the historical mean valuation multiple for BAC is achievable, considering the relatively muted impact from the banking crisis (discussed above) and the bank's growth opportunities for the long run (touched on in the subsequent section).

What Is The Long-Term Outlook?

Among BAC's business segments, I think that the Global Markets and Consumer Banking businesses have the most significant growth potential and will play a key role in supporting Bank of America's growth prospects for the long term.

Goldman Sachs (GS) Equity Research published a report (not publicly available) titled "BAC: Key Takeaways From Management Meeting" on March 1, 2023 detailing the insights drawn from a meeting with Bank of America's President of Global Markets, James DeMare. As per the GS report, BAC indicated at the recent March 1, 2023 meeting that its Global Markets business has "historically been stronger in micro than macro" and revealed that it is "looking to improve their macro offering."

As per its Q1 2023 earnings presentation slides, approximately 57% and 43% of Bank of America's FICC (Fixed Income, Currencies, Commodities) sales and trading revenue was derived from macro and credit/other products, respectively in the most recent quarter. This implies that there is room for BAC's Global Markets business to further expand its presence in macro FICC products such as rates and foreign exchange. Notably, BAC also mentioned at the GS meeting on March 1, 2023 that the company's Global Markets business is among the biggest four or five companies in the space. It is realistic to assume that BAC's Global Market business can rise in the ranking if it becomes more competitive in the area of macro FICC.

Separately, Bank of America's consumer banking business still has ample growth opportunities, even though BAC claims to have the largest share of "U.S. retail deposits" as highlighted in its Q1 2023 results presentation.

According to a March 16, 2023 JPMorgan (JPM) research report (not publicly available) titled "Management Meeting: Consumer Business Growth Continues", BAC's President of Retail Banking, Holly O'Neill revealed in an early March meeting that its consumer banking business has recently become one of the top 10 players in the "Ohio, Minnesota, and Colorado" markets where it has growth plans in place. In other words, although Bank of America's consumer banking business is the largest player in the country, there are still specific markets in the US where BAC has the potential to gain additional share. The recent banking crisis might throw up opportunities for BAC's consumer banking business to grab share from local banks operating in these markets where Bank of America is underpenetrated.

In a nutshell, I expect Bank of America to continue growing in the future, despite the fact that it is already a banking giant.

Bottom Line

I maintain a Buy rating for BAC, as my target price implies a +29% upside for the company's shares. The banking crisis didn't have a major impact on Bank of America's deposit flows and consumer deposit costs, and BAC still has good growth opportunities for the long term.

Asia Value & Moat Stocks is a research service for value investors seeking Asia-listed stocks with a huge gap between price and intrinsic value, leaning towards deep value balance sheet bargains (i.e. buying assets at a discount e.g. net cash stocks, net-nets, low P/B stocks, sum-of-the-parts discounts) and wide moat stocks (i.e. buying earnings power at a discount in great companies like "Magic Formula" stocks, high-quality businesses, hidden champions and wide moat compounders). Sign up here to get started today!