The bank sector, including Bank of America (BAC), has failed to keep up with the stock rally due to fears over loan losses. The sector is trading at book values comparable to the lows of the prior decade despite easily surviving the recent Fed stress test. Upcoming Q2 results will focus on investors are large credit losses, but the investment thesis remains highly bullish on BoA with the 3% dividend yield and limited risk to the long-term business model.
Limited Risk:
While the banks caused the 2008 financial crisis, the large financials have very limited risk of material damage to this crisis. Even under the severely adverse economic situation of the Fed with 10% unemployment, the Dow dipping 50%, and real estate prices collapsing, BoA ends the crisis with a strong capital position.
The bank started the stress test period with CET1 at 11.2%. BoA is predicted to end the period with this capital ratio at 9.0% and a low during the cycle of 8.5%.
Similar to the whole banking sector, BoA expects to absorb billions in losses during the 9 quarter stress period. The numbers are likely far worse than the actual COVID-19 shutdown facing the bank sector now.
The large banks report Q2 earnings this week with BoA reporting before the market opens on Thursday. In the hypothetical stress test, the large bank is forecasted to take a $46.5 billion provision for loans and lease losses and another $10.5 billion in trading losses along with a $10.0 billion goodwill impairment. In total, the losses are estimated at $24.1 billion above the $47.0 billion in pre-provision net revenue during the period.
BoA already took a $4.6 billion loan loss provisions in Q1 and the bank is likely to report a larger Q2 loan loss. The current downturn isn’t expected to last much beyond Q3 so the bank will see far better lower credit losses forecasted in the 2020 stress test.
Since conducting the stress tests, the Fed has changed how large banks can pay dividends. The bank is limited to only paying out actual earnings for the trailing four-quarter period with dividends capped at Q2 levels. BoA doesn’t appear at risk with analysts forecasting the bank generating a 2020 EPS far above $1.00 per share and the current dividend payout is only $0.72.
The bank only has a 3.0% dividend yield due to the rather small capital returns targeted at dividends. The Fed also prevented share buybacks while the large banks had already suspended buybacks back in March when the COVID-19 crisis started.
While BoA has plenty of capital at double the regulatory capital minimum of 4.5%, the Global Systemically Important Bank Surcharge of 2.5% and the additional 2.5% stress capital buffer requires the bank to maintain a CET1 ratio of 9.5%. The bank ended March with a 10.8% ratio.
All information on this website is of a general nature. The information is not adapted to conditions that are specific to your person or entity. The information provided can not be considered as personal, professional or legal advice or investment advice to the user.
This website and all information is intended for educational purposes only and does not give financial advice. Signal Factory is not a service to provide legal and financial advice; any information provided here is only the personal opinion of the author (not advice or financial advice in any sense, and in the sense of any act, ordinance or law of any country) and must not be used for financial activities. Signal Factory does not offer, operate or provide financial, brokerage, commercial or investment services and is not a financial advisor. Rather, Signal Factory is an educational site and a platform for exchanging Forex information. Whenever information is disclosed, whether express or implied, about profit or revenue, it is not a guarantee. No method or trading system ensures that it will generate a profit, so always remember that trade can lead to a loss. Trading responsibility, whether resulting in profits or losses, is yours and you must agree not to hold Signal Factory or other information providers that are responsible in any way whatsoever. The use of the system means that the user accepts Disclaimer and Terms of Use.
Signal Factory is not represented as a registered investment consultant or brokerage dealer nor offers to buy or sell any of the financial instruments mentioned in the service offered.
While Signal Factory believes that the content provided is accurate, there are no explicit or implied warranties of accuracy. The information provided is believed to be reliable; Signal Factory does not guarantee the accuracy or completeness of the information provided. Third parties refer to Signal Factory to provide technology and information if a third party fails, and then there is a risk that the information may be delayed or not delivered at all.
All information and comments contained on this website, including but not limited to, opinions, analyzes, news, prices, research, and general, do not constitute investment advice or an invitation to buy or sell any type of instrument. Signal Factory assumes no responsibility for any loss or damage that may result, directly or indirectly, from the use or dependence on such information.
All information contained on this web site is a personal opinion or belief of the author. None of these data is a recommendation or financial advice in any sense, also within the meaning of any commercial act or law. Writers, publishers and affiliates of Signal Factory are not responsible for your trading in any way.
The information and opinions contained in the site are provided for information only and for educational reasons, should never be considered as direct or indirect advice to open a trading account and / or invest money in Forex trading with any Forex company . Signal Factory assumes no responsibility for any decisions taken by the user to create a merchant account with any of the brokers listed on this website. Anyone who decides to set up a merchant account or use the services, free of charge or paid, to any of the Forex companies mentioned on this website, bears full responsibility for their actions.
Any institution that offers a service and is listed on this website, including forex brokers, financial companies and other institutions, is present only for informational purposes. All ratings, ratings, banners, reviews, or other information found for any of the above-mentioned institutions are provided in a strictly objective manner and according to the best possible reflection of the materials on the official website of the company.
Forex trading is potentially high risk and may not be suitable for all investors. The high level of leverage can work both for and against merchants. Before each Forex investment, you should carefully consider your goals, past experience and risk level. The opinions and data contained on this site should not be considered as suggestions or advice for the sale or purchase of currency or other instruments. Past results do not show or guarantee future results.
Neither Signal Factory nor its affiliates ensure the accuracy of the content provided on this Site. You explicitly agree that viewing, visiting or using this website is at your own risk.
