Results from banks like Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) suggest the Fed is getting closer to achieving its much-desired soft-landing. Bank of America’s Q2 results are driven by increased client activity compounded by higher interest rates. The higher rates impact demand and slow demand, but consumer credit health remains above pre-pandemic levels.
The takeaway is that the Fed has room to hike rates another few bps to fight inflation, and the chances of recession have been kicked off into the future. Bank of America presents a value opportunity in the financial sector between then and now, paying a nice 3.0% dividend yield.
Bank Of America Outpaces Consensus
Bank of America had a great quarter considering the amount of doom and gloom in the outlook. The company reported $25.2 billion in revenue for a net gain of 11% compared to last year. Company CEO Brian Moynihan says organic client growth and activity coupled with higher interest rates helped to drive the gain. Net Investment Income was the largest contributor, up 14% on loan growth and higher rates.
Non-interest income rose by 8% but is still strong; loans are up 3% and offset by a 1% decline in deposits. The revenue beat the Marketbeat.com consensus by 100 basis points and is compounded by a higher margin.
The company’s margin was boosted by higher rates, resulting in a 20% increase in GAAP earnings compared to last year. The $0.88 also beat the consensus estimate by 600 basis points to outpace the top-line strength by 500. Bank of America does not give guidance but shows clear momentum, so this strength should be expected in the following quarter.
More importantly, the company is showing strength while building its credit reserves in preparation for a possible recession next year.
Credit reserves more than doubled to $1.1 billion, increasing the tier 1 capital ratio by 23 basis points—the tier 1 ratio stands at 11.6% and well above requirements. Regarding the capital returns, the company paid shareholders $2.3 billion in Q2 in dividends and share repurchases.
Both are expected to continue, and another dividend increase is coming. The next increase will be worth high-single-digits to investors and could be declared any day. The company telegraphed the news in early July following the stress tests.
The Analysts See Double-Digit Upside For Bank Of America
The analysts' Bank of America stock activity is mixed this year, but the takeaway is bullish. The sentiment slipped to a strong Hold verging on Moderate Buy compared to last year's firm Buy, but the price target is more steady. The price target assumes about 25% of the upside for BAC shares and has been flat since last quarter.
July activity includes 1 price target increase and 1 decrease before the Q2 results were released, and they bracket the consensus nicely. The takeaway is that analysts hold the stock and support the price action.
The institutions also support the price action and have been buying strongly over the past 12 months. The bulk of activity was in Q1 2023, but it remained bullish on balance in Q2 and Q3. They own 67% of the stock: their buying is consistent with the bottom that formed following the banking crisis that began in Q1.
The chart is mixed but shows a bottom. The post-release action has the market up; the question is if it will follow through once the opening bell rings. If so, the stock could exceed the 150-day moving average to the analysts' consensus near $36.75. If not, this stock will remain range bound at current levels.
