Is Bank of America Corp Immune to Recession?
Bank investors remain concerned amid sell-off in global markets
Banks around the globe have been battered since market turbulence jeopardized investor sentiments around the globe. Nervousness among investors is on the rise, with bank stocks having lost a huge chunk of their value this year. While option prices are increasing and implied volatility on bank shares also rising, we explore Bank of America’s potential to withstand this downturn.
Analysts and investors have concerns over the fears of a recession despite the strong fundamentals of US banks and improving economic data. Since the recent rout in the stock market, investors have shared growing concerns of an economic downturn. At the same time, Bank of America sees a mere 25% chance of the US heading into a recession, as cited by Market Watch.
According to the economists at Bank of America Merrill Lynch, the risks of a recession are believed to be contained, despite rising. While industrial sector data has weakened, growth elsewhere remains to be promising. Recently, Joseph LaVorgna, Deutsche Bank’s Chief US economist suggested that the odds of a recession in the country have risen to 40%. However, the threat of a recession is suggested to be shallow, similar to what US saw in 2001.
Additionally, the yield curve, which has been flattening for a while now, saw shrinking difference between the two-year and 10-year bond yields.
While banks remain on the losing end of the spectrum, carving fresh 52-week lows in most of the trading days this week, big banks have taken the worst beating in February, with Morgan Stanley, Bank of America and Citigroup some of the worst performers. While there was no definite trigger to the market rout, there were several factors that resulted in the spillover effect this week. Fears of banks’ health in Europe was among the key reasons. Bank of America Corp (NYSE:BAC), which traded near its 52-week high last year, has lost one-third of its value in 2016, and today, hit a new low at $11.26.
We believe that Bank of America is set for a rebound, considering its strong fundamentals reflected in the recent earnings release. The stock remains our purest bet against the expectations of an interest rate hike. Yesterday, Janet Yellen, Federal Reserve Chairwoman, confirmed that the central bank might have to follow the course of negative interest rates. While economic conditions and overseas weakness remain the central bank’s main concerns, no explicit remarks regarding future rate hikes were made. "I do not expect the FOMC [Federal Open Market Committee] is going to be soon in a situation where it's necessary to cut rates…we are watching very carefully what's happening in global financial markets," stated Janet Yellen.
In the meanwhile, we believe that the possibility of a hike is more likely than cuts. And with future hikes still on the cards, Bank of America stands to benefit from the potential boost to its net interest income and net interest margin.
Coming back to the broader market concerns, the plunge in oil prices is one of the biggest worries that have led to investors pounding over banks’ exposure to the energy sector. In a conference call, Bank of America warned analysts and investors of bad loans if oil prices remain depressed. But keeping in mind the bank’s exposure (no more than 2-5%), Bank of America has set aside money to cover losses. Additionally, in case all its loans start to turn bad; Bank of America has enough earnings from operations to cover itself.
Recently, CLSA’s Mike Mayo argued that Bank of America’s balance sheet was recession proof. The analyst confirmed that the bank was resilient and had the ability to boost its book value “even in a recession.” Bank of America’s stock trades at a significant discount to its tangible book value and book value per share. “Bank of America loan losses at 3x its 4Q15 level and PPnR at 40% less (for nine quarters), creating a good margin of safety since dividends and buybacks are only paid after this assumed stress…income statement also leads to estimated growth in book value even in a recession assuming 3x higher loan losses, 11% lower revenues,” reads CLSA’s report.
We believe that investors are overpricing broad market concerns into Bank of America share price. A beta of 1.7 shows that Bank of America’s stock is quite volatile to broad market movement. As for its earnings generating potential, the bank has been able to post impressive earnings in its recent quarterly results and annual results for fiscal year ’15.
According to data on Bloomberg, the majority of analysts remain bullish on Bank of America stock. 31 out of 38 analysts recommend a Buy, seven advocate a Hold, while none are in favor of a Sell. The 12-month target price on the stock is $18.
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Bank of America
This time the stock records strong accelerated losses ... over 6% ... having split the lower part of the falling of channel K1 -K2 .... with downward gap ..... The indicator MACD and ..an moves into hyper Sold region has given output signal .... while stochastick Fast moving sideways down a super Sold price band ...
