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Balance Sheet, Slippages to Determine Bank of America’s Lending

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Dec. 4 2020, Updated 10:53 a.m. ET

Leveraging or deleveraging

The Fed has suggested four rate hikes in 2018, reflecting a strong stance on economic growth and inflationary pressures. Corporates have been deleveraging in 2008–2013. However, leverage started to built up amid near-zero rates over the past few years. Captive sectors like oil (USO) and other commodities have seen continued deleveraging amid weaker demand and higher supply. As a result, banks (XLF) have managed subdued growth in their loan books and could continue to see trends amid rising rates.

Bank of America (BAC) has outperformed peers including Citi (C) and Wells Fargo (WFC) in lending, trading, and wealth management. However, J.P. Morgan (JPM) has continued to rank first in investment banking and core banking operations.

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Expected growth

Bank of America expanded its loan book ~3% in 2017 to $937 billion. The bank is expected to see growth of 2%–2.5% in 2018, marginally subdued mainly due to higher rates and lower taxes allowing for higher cash flow generation among corporates. The bank’s deposits grew ~0.5% to $1.31 billion during the period, reflecting shifting deposits toward investment offerings.

Bank of America’s balance sheet size grew to $2.3 trillion in 2017. However, a provision for credit losses also rose to $1 billion from $774 million in 2016. However, the overall percentage remains fairly comfortable. The bank’s tier 1 equity ratio remained healthy at 11.8%, reflecting better asset quality. The return on equity or RoE is expected to improve substantially in 1Q18 and 2018, owing to lower taxes, higher repurchases, and higher operating leverage.

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