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Should You Buy Bank of America Shares After the Q2 Earnings Report?

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Bank of America (NYSE: BAC) recently announced its Q2 earnings that fell short of some estimates, while other metrics remained strong. The company’s Q2 GAAP EPS was $0.73, missing estimates by $0.02. At the same time, revenue grew 5.7% year-over-year to $22.7 billion, missing estimates by $90 million. However, some of the company’s results were seen as bullish signals as the stock rose 1.2% after making gains. Notably, BAC’s net interest income rose 22% to $12.4 billion, in part due to higher interest rates. On the other hand, non-interest income declined $989 million due to, among other things, a deterioration in capital markets and lower investment banking costs. Another positive for the company was that average deposits were up 7% at $123 billion for a total of $2.0T. Average loans and lease balances were also strong, as they rose $107 billion or 12% to $1.0 trillion.
Bank of America also strengthened its balance sheet compared to previous years. It noted that it is in a solid position to weather an economic downturn, such as in the case of a recession. The recently released investor presentation states that it is more balanced and carries less inherent risk. Some notable examples of how the company has achieved this include a reduced concentration of consumer loans, less exposure to unsecured consumer loans and mortgages, and less concentration in construction loans. It also made a notable pivot toward offering more Global Wealth Investment Management (GWIM) loans, which are loans extended to high net worth and high net worth individuals. GWIM loans increased from $100 billion in 4Q’09 to $222 billion in 2Q’22, while home equity loans shrank from $154 billion to $27 billion over the same period. Other risky lines of credit were also reduced, such as consumer credit card loans, which shrank from $161 billion to $84 billion. Overall, the bank said it has a significantly lower expected credit loss if a severe recession comes to fruition, with a nine-quarter stress-tested loss of $53 billion, or 5.2%, compared to $104 billion, or 10. % in 4Q’09.

The Bull Case for Bank of America

BAC is trading at the lower end of the 52-week range and has had a record low P/E ratio for the past two years. In the fourth quarter of 21, the company reached its peak share price of $44.02 with earnings per share of $3.57 and a price-to-earnings ratio of 12.33. Today, the share price at the time of writing is $32.42 with only a slightly lower EPS at -$0.06 or $3.51, and a much lower P/E ratio of 9.19, making it is undervalued on this relative basis.
Bank of America trades significantly below the MarketBeat consensus price target of $43.39, with upside potential of 45.34%. Bulls could interpret this fact as a sign that the company is undervalued at current levels.

Bank of America vs. JPMorgan Chase

JPMorgan Chase (NYSE: JPM) is one of Bank of America’s main competitors. JPM has a higher market cap than BAC at 331.24B compared to 259.83B. This smaller market cap is one of the reasons BAC has delivered higher returns for investors over the past decade. BAC returned 377.69%, while JPM returned 309.83%. While BAC has delivered higher returns, JPM’s dividend is significantly higher at $4.00 compared to $0.84. On the other hand, BAC’s 5-year dividend growth rate is higher than JPM’s as it stands at 22.87% compared to 15.33%.
In terms of valuation, the banks are neck and neck. The FWD P/E ratio of BAC is 10.02 while that of JPM is 10.07. The price/sales ratio is comparable; BAC is at 2.92 and JPM is at 2.79. One notable difference, however, is that BAC’s FWD EPS growth is higher at 26.08% compared to JPM’s 12.25%.

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