I retain a Buy rating for Bank of America's (NYSE:BAC) shares. In my previous article published on November 3, 2021, I touched on BAC's 5-year outlook. In this current update, I discuss whether Bank of America's positive stock price momentum this year can be sustained in 2022.
I see Bank of America's shares going up to $60 next year. The stock's key catalysts are Fed rate hikes, profit margin expansion and further share buybacks which are supportive of sustained earnings growth for the company. With a price target of $60 translating into an attractive +39% upside, I maintain my Buy investment rating for BAC.
BAC's stock price did very well in 2021 thus far rising by approximately +42%, and the company's shares have outperformed the S&P 500 (+23% year-to-date) by a huge margin over the same period as per the chart presented below.
Bank Of America's Share Price Performance In 2021 Year-To-Date As Compared To The S&P 500
Source: Seeking Alpha's Charting Data For BAC
Bank of America's outstanding share price performance in the current year can be attributable to the company's earnings beats in the last couple of quarters. BAC's earnings per share or EPS were above the market consensus' forecasts for six consecutive quarters up to 3Q 2021. In particular, Bank of America's quarterly EPS beat market expectations by at least +20% in each of the last three quarters.
BAC's Earnings Surprises For The Past 12 Quarters
Source: Seeking Alpha's Earnings Surprise Data For Bank Of America
Specifically, BAC's total revenue and diluted earnings per share expanded by +2.5% YoY and +114.8% YoY to $67 billion and $2.75 respectively in the first nine months of fiscal 2021. A +9.9% YoY growth in non-interest income to $35.5 billion in 9M 2021 more than offset a -4.8% YoY decline in net interest income to $31.5 billion during the same period, which helped to drive the top line expansion for Bank of America. BAC also more than doubled its bottom line YoY in the first nine months of 2021. It booked a benefit for credit loss of +$4.1 billion in 9M 2021 due to improved asset quality, as opposed to a provision for credit loss of -$11.3 billion in 9M 2020.
According to S&P Capital IQ's financial data, Bank of America traded at a consensus forward next twelve months' normalized P/E multiple of 14.2 times as of January 4, 2021, while it was valued by the market at a relatively lower 13.8 times consensus forward next twelve months' normalized P/E as of December 20, 2021. This suggests that BAC's +45% stock price increase in 2021 year-to-date has been largely driven by earnings growth rather than forward P/E multiple expansion. In the subsequent section of this article, I detail the Wall Street analysts' target prices for Bank of America, and try to determine what is the potential upside for BAC's shares.
Bank of America's current sell-side consensus price targets range from as low as $35.00 to as high as $64.00, with the average target price for BAC being $49.25. As a comparison, the company last traded at a share price of $43.16 as of December 20, 2021.
Bank of America's Mean Consensus Target Price
Source: Seeking Alpha's Sell-Side Ratings Data For BAC
In my opinion, BAC's stock price can hit $60 next year, which will be my price target for the company's shares. This is at the high end of the sell-side analysts' target price range ($35-$64), and represents a +39% premium as compared to Bank of America's last traded stock price of $43.16. My $60 price target for Bank of America is equivalent to a 16.5 times consensus forward fiscal 2023 normalized P/E as per S&P Capital IQ data.
This mid-to-high teens P/E multiple appears reasonable, when compared with the company's +9.9% normalized EPS CAGR for FY2023-2025 and FY 2023's consensus ROE of 11.2%. As a basis for comparison, Bank of America's annual ROE has not exceeded 11% between fiscal 2007 and 2020, while BAC's estimated EPS growth (+9.9%) for the FY 2023-2025 period is expected to be almost double that of its pre-pandemic FY 2019 EPS increase of +5.4%.
Forecasting BAC's stock price performance in 2022 involves making an assessment of how likely it is for Bank of America to deliver strong EPS growth and higher ROEs in fiscal 2023 (i.e. market discounts future financial expectations) and beyond as per consensus estimates highlighted in the preceding section.
I see three key drivers for Bank of America's improved financial performance going forward.
Firstly, there are expectations of multiple Fed rate hikes in the next year, which will help to boost Bank of America's net interest income growth.
CNBC reported on December 15, 2021 that "12 Federal Open Market Committee members expect at least three rate raises next year." Earlier, BlackRock's (BLK) CIO for global fixed income predicted that the Fed might raise rates by "three to four times in 2023" as per a December 14, 2021 CNBC article.
Notably, BAC was named "as most rate-sensitive bank in UBS's universe", according to a December 10, 2021 Seeking Alpha news article. Separately, a Citigroup sell-side banking sector report (not publicly available) titled "Refreshing Models For New Rate Curve" published on December 16, 2021 estimated that there will be "a 140bp (basis points) benefit to ROTCE (Return On Tangible Common Equity)" for Bank of America assuming a +100 basis points increase in short-term rates.
In other words, Bank of America is one of the key beneficiaries of Fed rate hikes that will be positive for BAC's net interest margin expansion.
Secondly, there is still room for Bank of America to achieve further cost efficiencies with greater economies of scale and investments in technologies.
In my November 3,2021 article, I noted that BAC's "efficiency ratio" decreased "from 71% in Q3 2020 and 70% in Q2 2021 to 63% in Q3 2021", and I highlighted that "one example of opportunities for cost efficiency improvement is in the area of technology and cloud" "partnering with IBM (IBM) to create an industry-first, third party cloud."
With respect to scale economies, Bank of America stressed at the Goldman Sachs US Financial Services Conference on December 9, 2021 that the company's "revenue was growing faster than expenses for 20 straight quarters", and emphasized that it is "an operating leverage company."
Based on S&P Capital IQ's financial forecasts, Bank of America's normalized net profit margin is estimated to increase from 27.7% in FY 2022 to 28.9%, 29.0% and 29.6% for FY 2023, FY 2024, and FY 2025, respectively.
Thirdly, BAC is very likely to continue shrinking the company's equity base via share repurchases which will increase its ROE and EPS in the future.
Market consensus expects Bank of America's number of shares outstanding to be reduced by approximately by +5% and +4% for fiscal 2022 and 2023, respectively as per S&P Capital IQ data. In the first nine months of the year between January 1, 2021 and September 30, 2021, BAC's outstanding shares have already declined by around -5% from 8,650.8 million shares to 8,241.2 million shares. It is reasonable to assume that Bank of America continues with a similar pace of share buybacks going forward.
More importantly, Bank of America has a strong capital position to support a further return of capital to shareholders such as share repurchases. At its Q3 2021 results briefing, BAC emphasized that its "CET1 (ratio) under standardized approach was 11.1%" which "was 160 basis points above our minimum requirement of 9.5%" and "translates into a $26 billion capital cushion."
In conclusion, I forecast that Bank of America's shares will cross the $60 mark in 2022, supported by these three key drivers mentioned in this section of the article.
BAC stock remains a Buy, as I maintain my investment rating as per my prior article written one and a half months ago.
My $60 target price for Bank of America's shares is based on a 16.5 times forward P/E multiple applied to the market consensus' fiscal 2023 EPS of $3.63. BAC's short-to-intermediate term EPS growth should be driven by higher net interest income as a result of rate hikes, margin expansion supported by operating leverage and cost efficiencies, and a shrinking equity base brought about by continued share buybacks.
Bank of America's Buy rating is supported by the $60 price target which is equivalent to a +39% upside as compared to its share price of $43.16 as of December 20, 2021.
The key risks for Bank of America include fewer-than-expected rate hikes in 2022 and 2023, a failure to realize greater cost efficiencies, and a lower-than-expected quantum of share repurchases in the near future.
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Those who believe that the pendulum will move in one direction forever or reside at an extreme forever eventually will lose huge sums. Those who understand the pendulum's behavior can benefit enormously. ~ Howard Marks
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.