Bank of America's ambition to surpass JPMorgan Chase as the top U.S. banking institution has encountered significant challenges. Not long ago, under the leadership of CEO Brian Moynihan, Bank of America capitalized on its strong deposit foundation, positioning itself as a stable financial institution.
This strategy seemed promising, especially when, post-Covid-19 outbreak, BofA's stocks surged by 116% over two years ending April 1, 2022, outpacing JPMorgan's 70%. At this juncture, BofA's valuation was also at a premium, standing at 12 times its 12-month forward earnings, marginally ahead of JPMorgan's 11.8 times.
However, the evolving economic landscape, marked by rising interest rates, has shifted the dynamics. BofA now grapples with challenges, trading at 8.2 times earnings, a notable 15% less than JPMorgan's 9.6 times. This is largely attributed to BofA's substantial holding of low-yield mortgage securities and other bonds, which resulted in unrealized losses amounting to $105.8 billion by the end of Q2. These losses are projected to have increased further in Q3. The persistent issue of these unrealized losses remains a significant concern for stakeholders.
UBS analyst, Erika Najarian, notes the recurrent discussion surrounding BofA's securities portfolio. This sentiment is evident in the credit-default swaps market. At 2022's onset, BofA's and JPMorgan's five-year CDS were almost at par, trading near 50 basis points. However, recent data indicates that while JPMorgan's rate increased to 63.4 basis points, BofA's skyrocketed to 97.3, surpassing even Wells Fargo and Citigroup.
Addressing these concerns, BofA's CFO, Alastair Borthwick, stated that the bank is actively reducing the size of the problematic portfolio, redirecting resources to cash and loans. While there's minimal anticipation of BofA defaulting, its current position relative to peers, including Wells and Citi, has been compromised.
The upcoming earnings report is anticipated to reflect the challenges posed by the higher interest rates. BofA's expected profit stands at 83 cents a share, a modest 2.5% rise from the previous year. This growth pales in comparison to JPMorgan's 39% and Wells Fargo's 74%.
However, BofA might have a redemption opportunity. Najarian believes the market will eventually shift its focus from bond losses to credit and capital. The bank's resilience amidst rising default rates will be crucial in determining its stock performance. Najarian suggests that BofA could stabilize investor sentiments by projecting when net interest income will stabilize, even if specific numbers aren't provided immediately. Her belief is that indicating a potential stability in NII by Q1 2024 could positively influence stock perception.
Despite these challenges, BofA's stocks appear undervalued at 8.2 times 12-month forward earnings, nearing its lowest during the financial crisis. Trading at approximately 1.03 times tangible book value, it's only slightly higher than its low during the Covid-19 outbreak. The prevailing question is, how much more challenging can it get for Bank of America?
