he prospect of a rise in US interest rates this year coupled with attractive valuations and a return to paying dividends are generating interest in the banking sector. Buying bank shares is hardly without risk, regulations are getting stricter globally and more fines are expected over LIBOR and FX market-rigging whilst HSBC is likely not the only one with Swiss secrets.
Bank of America
has one of the most attractive valuations amongst the major US banks, but it’s much lower return on assets and equity suggest that maybe for good reason, it’s not as profitable.
Fourth quarter results were dragged down by poor fixed income trading and high legal costs that plagued it all last year. The bank still managed to beat profit estimates thanks to CEO Brian Moynihan’s cost-cutting drive, but revenues sagged.
An uptick in fixed income trading revenue reported by JP Morgan in the first quarter is a positive sign for results across the banking industry. A rebound in fixed income trading by Bank of America could be the difference-maker. The bank settled a major mortgage case with the US government last year, so legal costs should play a much less prominent role in this quarter’s results.
Bank of America’s dividend payout ratio is very low right now, historical president suggests this has a lot of upside once the company turns around. If cost-cutting continues and the US housing market holds up, Bank of America could stand to benefit if the Federal Reserve does finally hike rates this year.
Last quarter’s numbers
EPS: $0.32 vs $0.31 expected (2.4% beat)
Revenue: $19.58B vs $21.03B expected (6.9% miss)
This quarter’s expectations:
Adjusted EPS: $0.29 (was $0.34 in November)
Bank of America’s forward P/E is 11.3; this is undervalued compared to the sector median of 12.0 and the S&P 500 which stands at 17.1.
Shares dropped on the day of the last earnings report, but a day later put in a low just under $15 that has not been breached since. The price topped out at above $16.50 and has since drifted close to the levels seen before the last report. Price has been supported by a rising trendline connecting the October 2013 and May 2014 lows. An upside breakout in momentum suggests shares could re-test $16.50, with a further move to $18 to follow.
Bank of America daily candlestick chart, 14/4/15, 12.12pm BST
Source: CMC Markets
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