Bank Of America Could Be An Outlier In A Struggling U.S. Banking Sector

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  • US banks are in dire straits as the economy nears a recession
  • Volatility in equity and debt markets weighs heavily on investment banking operations
  • Net interest income is a bright spot after years of historically low borrowing costs

What a difference a year has made. After finishing 2021 as one of the best performing sectors in the United States, the US banking sector is struggling to find its footing this year.

The is down about 28% since January as the risk of a prolonged recession clouds the outlook for the sector.

KBW Banking Index Weekly Chart

The group’s losses were led by some of the nation’s largest lenders, with JPMorgan (NYSE:) down 33.6% this year and Bank of America Corp (NYSE:) down 31.7%.

Additionally, Morgan Stanley (NYSE:) and Goldman Sachs Group (NYSE:) said headwinds to profitability are strengthening, pointing to tighter monetary policy and pressure on corporate margins as key concerns.

Despite growing credit spreads in a higher environment, equity and debt markets have dampened the transactions that fuel investment banking operations, reducing one of their main sources of fee income.

JPMorgan temporarily suspended share buybacks and announced a second quarter that fell short of analysts’ estimates. Goldman Sachs’ investment banking revenue fell 41%, reflecting a sharp drop in underwriting.

The group’s earnings could be hit by slower loan growth, a tightening between Treasuries and an increase in loan defaults. Over the next few months, banks may show the impact of slowing consumer spending which has previously held up well.

While some stocks may have bottomed out in a moderate recession scenario, the risk of a deeper downturn will likely continue to weigh on the group.

Best net interest income growth in the sector

That being said, I find that certain bank stocks offer a good entry point after taking into account the current risks and the decline in the value of their shares. Bank of America is one such stock.The United States’ second-largest lender is uniquely positioned to take advantage of soaring interest rates, shielding its earnings from other macro headwinds.

Net interest income rose 22% to $12.4 billion in the second quarter due to higher rates and loan growth.

According to Chief Financial Officer Alastair Borthwick, the NII will continue to rise, climbing from $900 million to $1 billion this quarter. Continued growth in the fourth quarter should bring the total increase to more than $2 billion for the remainder of the year, which will boost the bank’s bottom line.

Bank of America’s ability to generate higher income on its loan portfolio is the main reason analysts see the bank’s earnings per share recovering sharply from next fiscal year and getting a major boost over the course of the year. over the next three years, according to data from InvestingPro.

BAC Analyst Revenue and EPS Forecasts

BAC Analyst Revenue and EPS Forecasts

Source: InvestingPro

Analysts on average expect the bank to report $3.20 per share this year, then rise to $3.75 per share in 2023. And that counts on a significant economic downturn. If the economy enters a mild recession, Bank of America could earn $4.20 per share in 2023, according to these calculations.

In a note this month, Wells Fargo reiterated Bank of America’s overweight, saying the banking giant had “improved the industry’s interest rate positioning.” The note adds:

“BAC is one of the best examples of improving industry positioning in terms of interest rates – the best NII (net interest income) growth among the largest banks.”

For Evercore ISI analysts, BAC is their top choice in today’s tough economic environment for its ability to generate strong free cash flow. Bank of America has an FCF yield of 19.5% and a shareholder return of 8.1% over the past 12 months.

These bullish sentiments are also reflected in an Investing.com poll in which most analysts rate BAC as a buy. Their consensus price target shows more than 44% upside potential over the next 12 months.

BAC consensus estimates

Source: Investing.com

Conclusion

Bank stocks are likely to remain under pressure as investors shun the sector due to its exposure to the broader economy and uncertainty surrounding consumer spending behavior.

However, banks are in much better shape this time around due to strong balance sheets and much lower exposure to subprime mortgages. Of this group, Bank of America is my preferred choice after its stock suffered a significant correction.

Disclosure: At the time of this writing, the author is long at BAC. The opinions expressed in this article are solely the opinion of the author and should not be taken as investment advice.

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