Analyst Recommends Adding Bank of America (BAC) Stock to Your Portfolio; Here’s Why


Morgan Stanley’s Betsy Graseck recommends filling your cup with some of this all-American stock — Bank of America Corporation (BAC) stock. It might come as a bit of surprise to some. There’s been quite a bit of selloff in the banking sector, which drove BAC stock down nearly 25% since mid-September. The biggest driver of BAC’s recent decline seems to be a flattening yield curve. An inverted curve is a historical indicator of recession and could cut down interest income.

However, with BAC now generating an 11% return on equity (ROE) and 16% return on average tangible common shareholder’s equity (ROTCE) along with a management team “committed to generating positive operating leverage even if top line stalls,” Graseck remains bullish. The analyst reiterates an Overweight rating on BAC with a price target of $36, showing a potential upside of nearly 58%. (To watch Graseck’s track record, click here)

The analyst explains that while the stock is still living it down from the recession in 2001, in which if a similar situation would occur today would bring earnings down by about 25%. But that’s the bear case! Graseck presents the bull case – where a positive 2-3% loan growth, 10bp annual credit normalization and total capital return of 85-95% of earnings garners 15% EPS growth and 70-110bp annual increase in ROEs in the next two years.

“Accelerating loan growth, a more rational stress test and rising buybacks should come through in 1H19. Loan growth accelerates from 1.5% in 2018E to 2.6% in 2019E as BAC is finished exiting on-core card relationships and is doubling down on middle market client coverage. A more rational stress test becomes clear in late January when the test requirements are released. June should bring higher capital return, we estimate a 95% payout ratio in the 2019 CCAR period.

Taking a look into the future, Graseck has a recommendation for the company: “BAC also stands to benefit the most from higher short-term rates even if the long end comes down a bit, given its skew to stickier consumer deposits, which make up 52% of its deposit base. Credit quality is strong given BAC’s tighter underwriting standards post-crisis” the analyst suggests.

All in all, the analyst says she has high expectations for the stock: “We expect significant operating leverage improvement as BAC is delivering on our Banking at the Speed of Light theme. Our recent meeting with Brian Moynihan, BAC CEO, confirms management focus on delivering operating leverage, even if revenues are flat.”

This troubled banking giant certainly has the Street divided. Based on 9 analysts polled in the last 3 months, 5 are bullish, while 4 remain sidelined. The 12-month average price target stands at $34.56, marking a nearly 50% upside from where the stock is currently trading. (See BAC’s price targets and analyst ratings on TipRanks)

 

 

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