Among one of the most heavily traded stocks on the market, shares of Bank of America (BAC) plunged last week by 8%, similar to the fall other companies in the finance sector as the yield curve inverted itself. An inverted yield curve is often hailed as one of the best ways to predict a recession, which could have a massive impact on bank stocks. This happens when long-term debt yields become lower than that of short-term — which is important in banking because short-term debt is what banks borrow, while long-term is what they loan. So as borrowing becomes more expensive than lending, revenue potential decreases.
But even as this is an ominous sign for bank stocks (and the economy in general), J.P. Morgan analyst Vivek Juneja remains a buyer of BAC stock, with an Overweight rating and $31 price target. (To watch Juneja’s track record, click here)
Though investors were spooked by the inverted curve and fears of a recession, after meeting with senior BAC management, Juneja says the bank believes it “can withstand 1980s type recession and maintain CET1 ratio above 9.5%,” an important solvency measure that serves to protect the economy at large from a crisis.
Juneja points out that the highest risk comes from “outside the banking industry in loans held by nonbanks,” with BAC expecting the “biggest fallout to banks will be the impact to the economy from defaults of loans held by non-banks.” Furthermore, the analyst relays BAC management concerns “about the potential impact from low liquidity in the system as banks will not be able to step up as in the past because of their own constraints.”
The analyst says BAC’s “leveraged exposure is about 1% of commercial commitments, about half of which is drawn – this implies about $5 bil of funded loans or less than 1% of total loans.” BAC reports this as a strength, with Juneja remarking that BAC is “one of the two banks that are lowest as a proportion of leveraged loans to capital, well below regional banks per a recent study.” The analyst also says BAC is a “leader in overall leveraged loan syndications but has a lower rank in LBO financings.”
All in all, Bank stocks do not always have control over their destinies, as macro events could provide challenges (or opportunities). This was seen with the the yield curve inversion last week, as BAC and other bank stocks plummeted. But nevertheless, the investment community is still bullish on BAC stock. TipRanks analysis of 14 analyst ratings shows a consensus Moderate Buy rating, with eight analysts recommending to Buy the stock, and six remain sidelined. The average price target among these analysts stand at $32.62, which represents a 20% rise from current levels. (See BAC’s price targets and analyst ratings on TipRanks)