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Why Are Analysts Bullish on Bank of America?

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Analysts are bullish on Bank of America

Wall Street analysts have been bullish on shares of Bank of America (BAC) on prospects of an interest rate hike and attractive valuations. Further, the bank’s earnings have shown tremendous improvement in the last few quarters, leading to several ratings upgrades.

At an industry conference held by Barclays (BCS), the head of Bank of America’s investment banking business, Christian Meissner, said that 3Q16 revenue would be higher for its investment banking and trading businesses, as mergers and acquisitions activity had picked up. High yield debt and leveraged finance also showed improvement.

In a Bloomberg survey of 38 analysts, 28 (or 74%) have assigned “buy” ratings to BAC, while ten (or 26%) have rated it as a “hold.” The stock has currently received no “sell” ratings. BAC has a consensus target price of $17.33, resulting in a one-year upside potential of 11.3%.

Morgan Stanley (MS) reiterated its “overweight” rating on Bank of America in a note to investors earlier this week.

Analyst Betsy Grasek expressed optimism about the bank’s change in accounting policy with regards to premium amortization on its debt securities, allowing a longer period of time to pay off debt over the contractual life of the bond instead of its estimated life.

Graseck believes that this revision, effective from 3Q16 onward, will lower the bank’s earnings volatility. Graseck said, “BAC’s new accounting policy will lower its earnings volatility. Result is positive; less stock tail-risk, more buybacks.”

Grasek also said, “This is something investors have been asking for. We believe this is positive for the stock as it 1) reduces volatility in NII and earnings; 2) makes BAC’s results more comparable with those of peers.”

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Last week, Goldman Sachs (GS) reiterated its “conviction buy” rating on Bank of America and raised the stock’s target price from $17 to $19. On September 13, 2016, Société Générale downgraded Bank of America from a “buy” to a “hold.” Shares of the company have risen ~25% in the last three months, driven by bullish sentiments on the stock and analysts’ upgrades.

ETF exposure

Investors looking for ETF exposure to Bank of America could invest in the iShares U.S. Financial Services ETF (IYG) or the SPDR Financial Select Sector ETF (XLF). IYG invests 8.0% of its portfolio in Bank of America, while XLF invests 5.4%.

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