You don’t have to be Federal Reserve chair Jerome Powell to know interest rates are rising, and that this should be good news for Bank of America (NYSE:BAC), and by extension, BAC stock.
All you need to do is look at the federal budget, which shows $1 trillion of new borrowings this year, as the country starts paying for this year’s tax cut party.
That means inflation is rising, which can be good for banks. They can raise interest rates to compensate. It could mean recession, but BAC stock owners are ready for it.
The bank breezed through the latest stress test, so its capital is adequate to handle the next downturn. This let it raise its dividend this summer to 15 cents per share.
The stress tests indicate the dividend is safe, but at 2.15%, it’s less than you can get giving the government your money for just three months.
The good news is it has been rising. It could rise further.
BAC Stock and Recessions
Investing in big bank stocks like Bank of America stock makes sense based on either inflation or recession, as both can be good for banks. Inflation means they get a better price for money. It increases the “yield spread” between what a bank pays for money and what it gets from borrowers. Recessions mean big banks can acquire smaller ones.
This was not true during the last recession, which was centered on the banks. The stress tests, which require retention of capital to pass, are designed to avoid that. Since Brian Moynihan became CEO in 2019, Bank of America stock is up 83%.
Bank of America’s third quarter is a good illustration of what is happening. Its net interest margin was 2.42%, and a strong economy meant fewer loans turned out bad than expected. Earnings were 66 cents per share, and revenues were $22.7 billion. At its Nov. 5 market cap of $273 billion, you’re paying less than four times revenue for the stock, and earnings were more than four times higher than the dividend.
Rising interest rates should keep the dollar strong during the next downturn, and the relative strength of U.S. banks compared with European rivals like Deutsche Bank (NYSE:DB) put them in a great position globally. The bank must be confident, because it awarded bonuses to 95% of employees, payable early next year.
The Fintech Challenge
The bonuses are designed to keep morale high as the bank has laid off 70,000 people under Moynihan, and these layoffs include those working on obsolete technology platforms. The bank is opening new branches, but these are more like storefronts, and some don’t have any employees in them at all.
Taulli’s not alone. Bank of America stock is Warren Buffett’s largest bank holding and he has put $600 million of Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) money into other fintech companies this year. Bank of America is one of the largest issuers of credit cards, and its share is highest in commercial cards.
Bottom Line on Bank of America Stock
The bottom line for BAC stock is safety.
It’s a safe investment in troubled times. The Dodd-Frank stress tests have forced it to be more financially sound, able to withstand higher loan losses if the economy goes into recession. It is investing heavily in technology, dumping old platforms for new ones and reducing the costs of acquiring money from customers.
Yield spreads mean banks can finally charge money for money. Bank of America is well positioned. It’s a safe place for you to put your money right now, either as a depositor or a stockholder.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.