Our Bank of America Stock Prediction in 2019 (Buy or Sell?)
In the wake of the 2008-2009 financial crisis, Bank of America (NYSE: BAC) was left for dead.
While it is taken many years for Bank of America to get back on its feet, the company is now standing tall.
The bank has long since disposed of its toxic assets, its operating metrics are soaring, and the bank’s balance sheet is in solid shape.
But do hidden dangers lurk for BAC shares? With the stock market on a roller-coaster and many analysts predicting an economic downturn in 2019, is it prudent for investors to hop aboard the BAC train? Many factors could still derail it.
Our BAC stock prediction will examine the pros and cons of this revamped company and we’ll see what 2019 has in store for it.
What Is Bank of America?
With a market cap of $282.1 billion, Bank of America is far more than just a consumer-focused company. Consumer Banking is but one of four divisions.
Sure, Consumer Banking entails the traditional products, like check and savings accounts, CDs and Individual Retirement Accounts, investment accounts, and credit and debit cards. Yes, it still offers residential mortgages, home equity loans, and even auto, recreational vehicle, and consumer personal loans. To give you an idea of the bank’s retail footprint, it has 4,500 branches and 16,000 ATMs.
But the bank is a financial colossus with its fingers in many pies.
The Global Wealth and Investment Management division offers brokerage, banking, and trust and retirement products, as well as wealth management services for high net worth clients.
The Global Banking division provides lending products and services, including leases, commitment facilities, commercial loans, finance, and real estate and asset-based lending. This also includes treasury management, foreign exchange, and short-term paper options
The Global Markets division includes market-making, financing, securities clearing, risk management, foreign exchange, and mortgage-related products.
Bank of America has more than 200,000 employees around the world.
How Has Bank of America Stock Performed?
- Over the past year, BAC shares have gained 29% whereas the S&P 500 has lost 9%.
- Over the past two years, BAC shares have gained 24% whereas the S&P 500 has gained 15%.
- Over the past five years, BAC shares have gained 73% and the S&P 500 has gained 48%.
How Has Bank of America Stock Performed in 2017/2018?
- In 2017, Bank of America shares gained 31% whereas the S&P 500 gained 19%.
- In 2018, Bank of America shares gained 29% whereas the S&P 500 lost 9%.
Who Are Bank of America’s Rivals?
As a mega-cap “money center” bank, BAC counts as its rivals other money center behemoths.
Wells Fargo (NYSE: WFC)
Ah, what can we say about Wells Fargo that doesn’t include the multitude of scandals facing it?
Wells Fargo has always been a banking leader in the U.S., and has become a global powerhouse in recent years. It’s a bit smaller than BAC in market cap, coming in at $229 billion.
Wells Fargo wasn’t hit quite as badly with toxic mortgages during the financial crisis, although it certainly had its struggles. Those struggles have been replaced with numerous public relations black eyes.
The first scandal came in 2016, when the company created 1.5 million fake deposit accounts and over half a million fake credit cards, all using customer names without their permission. This number later ballooned to 3.5 million.
Then the U.S. Department of Justice took the bank to task for improperly repossessing the cars of military members. Several other scandals continue to plague WFC, which has paid heavy fines and penalties.
JPMorgan Chase (NYSE: JPM)
JPMorgan Chase (market cap: $341 billion) also had its struggles during the financial crisis, but like Bank of America, it picked up major assets on the cheap, notably investment bank Bear Stearns when it imploded.
JPMorgan Chase is now the sixth largest bank in the world as measured by assets — $2.6 trillion.
The bank boasts several significant metrics that beat Bank of America’s. Not only does JPMorgan Chase hold more assets, but it generates a better return on those assets than Bank of America. If you look at the return on asset ratio, you’ll find that JPMorgan Chase is closer to 1.26% while Bank of America’s hovers at 1.21%.
As for operating profit margins, which is a way of measuring operating efficiency, you’ll also see that JPMorgan Chase has margins of about 25% compared to Bank of America’s 19%.
JPMorgan wins again regarding return on equity, with a ratio of about 10.2% compared to Bank of America’s 8.3%. But as you’ll see below, BAC stock is cheaper.
Citigroup (NYSE: C)
Citigroup (market cap: $127 billion) also encountered major struggles during the global financial meltdown and, like Bank of America, is still trading at a price that was below what it was before everything collapsed.
One of the major differences between Citigroup and Bank of America is that Citigroup has a much larger international presence. Citigroup is truly a global entity whereas Bank of America’s operations are concentrated domestically.
Citigroup has been particularly focused on Latin America and Asia for retail banking.
One downside for Citigroup: it’s more dependent on short-term borrowing. The Federal Reserve’s increase of short-term borrowing rates is cutting into Citigroup’s margins.
Will Bank of America Stock Go Up in 2019 (Should You Buy?)
Bank of America is probably the best positioned in 2019 of all of the major banks. That’s because it had further ground to regain compared to the others. The bank now is leaner and more competitive than ever.
Rising interest rates are providing tailwinds for Bank of America and its peers. Banks make higher profits on loan spreads when rates rise. BAC also is trading about 20% below its recent highs, a strong argument that the bank’s stock is currently a value.
Bank of America is an example of how certain big, well-known corporate stalwarts still represent smart growth plays, even in this overvalued market.
One of the metrics we look at with banks is operating leverage. Bank of America has had positive operating leverage for 15 consecutive quarters. It’s also encouraging that the company spent almost $20 billion on share buybacks.
We’re ordinarily not big fans of share buybacks because companies will often buy back their own shares at prices that are too expensive. But we think Bank of America has been buying back its stock at appealing prices.
We’re also impressed that Bank of America is engaged in careful underwriting. Total net charge-offs are expressed by a ratio. That ratio for BAC is a low 0.40%, which is outstanding.
There are several ways to compare valuations on banks, but using a price-to-earnings ratio doesn’t really work. We prefer to use ROA and ROE.
- ROA is “return on assets.” This metric gives us an idea of how profitable a company is relative to its total assets. The higher the return on those assets, the more efficient the company is at generating earnings.
- ROE is “return on equity.” This is a measure of financial performance, which is calculated by dividing net income by shareholders equity.
BAC has an ROA of 1.21% and ROE of 10.57%. The ROA is 5 basis points above the S&P 500’s average but the ROE is below the average of 11.86%. Thus, we have a split vote as to whether Bank of America is cheap or underpriced based on market averages.
However, rising interest rates help push the argument into Bank of America’s favor.
Here’s a video of Warren Buffett explaining how to value banks.
Will Bank of America Go Down in 2019 (Should You Sell?)
Now let’s turn our attention to whether Bank of America is expensive and overpriced in relation to its competitors. That’s a little different than what the average is for the rest of the market.
As we said, BAC has an ROA of 1.21% and ROE of 10.57%.
Wells Fargo has an ROA of 1.19% and ROE of 11.29%. So Wells Fargo has slightly worse metrics on ROA but significantly better metrics on ROE. That would suggest Bank of America is slightly overpriced.
JPMorgan Chase has an ROA of 1.26% and ROE of 12.68%, which means the bank has slightly better metrics on ROA and far better metrics on ROE. That would suggest Bank of America is overpriced.
Citigroup has an ROA of 0.96% and ROE of 9.07%. Citigroup has much worse metrics on ROA and on ROE. That would suggest Bank of America is underpriced.
Overall Bank of America Forecast and Prediction for 2019
So what is our BAC stock prediction for 2019?
As you can see, trying to place a valuation on banks is rather difficult. We get mixed messages in terms of Bank of America’s metrics compared to the market averages, as well as to its direct competitors.
Nonetheless, Bank of America faces substantial growth prospects and boasts a rock-solid balance sheet. We think the bank has more room for capital appreciation than its peers. BAC also is an attractive alternative to a volatile and pricey technology sector.
Bank of America isn’t a sexy “story stock,” but that’s why we like it. It should prove more resilient in the market selloffs to come than the Silicon Valley darlings.
What’s more, with BAC stock down about 20% from its highs, it represents a compelling bargain. Every portfolio should hold at least one financial services stock; it’s hard to see how you could go wrong with Bank of America.