With a YTD (year-to-date) return of ~5%, Bank of America (or BofA) (BAC) is currently the second-best-performing stock among the five largest US banks on the basis of market capitalization. BofA has also outperformed the Financial Select Sector SPDR ETF (XLF), which tracks an index of S&P 500 financial stocks. It has gained a mere 1.3% YTD.
What’s driving the stock?
The optimism surrounding BAC stock can be attributed to its fantastic record of positive earnings surprises. It has surpassed Wall Street estimates in each of the last nine quarters with an average surprise of 11.4%. In its latest earnings results for the second quarter, BofA reported EPS of $0.64, which surpassed Wall Street’s estimate of $0.57 and marked a significant YoY (year-over-year) improvement of ~36%.
The Federal Reserve’s hawkish monetary policy will continue to support BofA’s bottom-line results. Since the inception of the Federal Reserve in the early 20th century, it has been a spreading trend, and net interest margins for banks expand in a rising interest rate scenario. The central bank raised interest rates twice in the first half of 2018 and intends to increase it two more times in the second half of the year and three times next year. In Q2 2018, BofA’s net interest margin improved 10 bps (basis points) YoY to 2.4%.
BofA also cleared the Fed’s Dodd-Frank Act Stress Test, which ensures its financial strength. In late June, the Fed announced that BofA was among the 34 major US banks that passed the test, which checks a bank’s ability to endure a major economic crisis.
Strong economic growth, a healthy jobs market, tax cuts, and easing regulations are creating a pleasant business environment for BofA. The US GDP grew 4.1% in Q2 2018.
In the rest of this series, we’ll take a look at BofA’s fundamental and macro growth drivers, valuation, and analyst recommendations, which could push the stock higher.