BofA (BAC) Rides on Rates & Expansion Efforts, Fee Income Ails
Bank of America BAC remains well-poised for growth on decent loan demand and higher rates. Also, the opening of new financial centers and improving digital capabilities will bolster its top line. However, fee income growth challenges and a tough operating backdrop are major near-term concerns.
BofA has been witnessing improvement in net interest income (NII) and net interest yield on higher interest rates and decent loan demand. The company's NII recorded a four-year (ended 2022) compound annual growth rate (CAGR) of 2.4%. Likewise, net interest yield expanded to 1.96% in 2022 from 1.66% in 2021.
With the Federal Reserve expected to keep interest rates high in the near term, the company's NII and net interest yield are likely to keep rising. Further, modest loan demand will offer support. BAC expects NII (FTE) to be around $14.3 billion for the second quarter of 2023 and grow 7-8% for 2023. We project NII to grow 7.4%, net interest yield to be 2.15% and net loans and leases to rise 2.4% this year.
Last month, this Zacks Rank #3 (Hold) company announced plans to open financial centers in both new and existing markets. By 2026, the company plans to expand its financial center network into nine new markets. Thus, once the initiative is complete, BofA will have financial centers in more than 200 markets across 39 states.
By the end of this year, more than 2,500 centers will have been renovated, creating offices and meeting spaces for clients to engage with financial specialists and ensuring a consistent and modern experience across all centers. These initiatives, along with the success of Zelle and Erica, will enable BAC to improve digital offerings and cross-sell several products, including mortgages, auto loans and credit cards.
Unimpressive fee income growth is a major headwind for BAC. Trading revenues (constituting almost 20% of total net revenues) witnessed a year-over-year decline in the first quarter of 2022 despite higher volatility. Although the metric improved in the remaining three quarters of 2022 and the first quarter of 2023, the performance of the trading business remains uncertain because of the volatile nature of the capital markets. We expect total sales and trading revenues to decline marginally in the second quarter of 2023.
Further, weakness in investment banking (IB) persisted due to poor performance of the underwriting and advisory businesses across the industry. The poor IB performance is likely to continue till the macroeconomic and geopolitical uncertainty remains. We expect IB income to decline 4.9% this year.
So far this year, shares of BofA have lost 11.9% compared with the industry's 4.1% fall.
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Banks Worth a Look
A couple of better-ranked stocks from the banking space are LCNB Corp. LCNB and Bank7 Corp. BSVN.
The Zacks Consensus Estimate for LCNB’s current-year earnings has moved marginally higher over the past 60 days. Its shares have declined 8.2% in the past three months. Currently, LCNB sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Bank7 currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been revised 1.1% upward over the past 60 days. In the past three months, BSVN’s shares have rallied 7.7%.
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