Bank of America: Q1 Stable in All Parts, Except Credit Losses
Company Update (BAC US) (Buy): Q1 results support our view shares are at ~10x normalized P/E; we see ~50% upside in the next few years.
Highlights
Falling after results, BAC now has a 1.4x P/TBV and ~10x P/E.
Adjusted ROTCE was 13.8% in Q1 and most op. drivers were stable.
Credit costs were worse than pre-COVID but guided to level off.
BAC is “cheaper” than JPM and we expect a P/E re-rating to 12.5x.
At $34.68, we see total return of 52% (17.2% p.a.) by end of 2026.
Introduction
We review Bank of America (“BAC”) after shares fell 3.5% on Monday following Q1 2024 results, mirroring the 6.5% decline in JPMorgan (“JPM”) shares after their quarterly results last Friday (April 12).
BAC shares have decisively recovered from its lows during last year’s U.S. regional banking crisis, though they remain 31% lower than the ~$50 peak reached in January 2022:
Bank of America Share Price (Last 5 Years)
Source: Google Finance (16-Apr-24).
We have maintained a Buy rating on BAC shares since our first public article on the bank in October 2019. More recently, BAC had been part of our “Select 15” model portfolio from the start of 2023 until we exited in March 2024, during which it generated a 15% gain. We continue to hold some BAC shares personally, though partly due to tax considerations.
BAC’s Q1 2024 results support our investment case. Excluding the one-off FDIC special assessment, Return on Tangible Common Equity (“ROTCE”) was 13.8% for the quarter, slightly higher than our long-term assumption of 13.5%. This ROTCE was achieved on a capital base that is large enough for existing Basel III Endgame proposals. Deposits were broadly stable, Net Interest Yield rose sequentially and Net Interest Income (“NII”) actually grew. Loan growth was tepid, but NII is still expected to trough in Q2 then start rising after. Expenses rose less than inflation and are expected to start trending down again. Credit losses were above pre-COVID levels, but management expect them to level off.