Bank of America wins upgrade on business lending, healthier balance sheet

By Steve Gelsi

Analyst David Konrad raises Bank of America rating to outperform from market perform

An expected bump in Bank of America Corp.'s net interest income as it grooms its balance sheet and grows yields in its business lending led KBW to upgrade the megabank's stock on Friday.

KBW lifted its rating on Bank of America (BAC) to outperform from market perform, raising the bank's price target to $46 a share from $37 a share.

Bank of America's stock rose fractionally on Friday, as most financial stocks lost ground.

Prior to Friday's trading, the bank's stock was up by 16.6% in 2024, outpacing the 13.9% rise by the S&P 500 SPX.

Analyst David Konrad said the firm is projecting Bank of America's fourth-quarter net interest income to be about 5% above KBW's latest estimate.

Net interest income is the profit banks make from loans minus the interest they pay for deposits.

The bank's work to improve its balance sheet returns by using capital to boost the value of its asset holdings stands out as another positive for its stock, he said.

The bank is also expected to generate improved yields in its commercial and industrial loans after a slowdown in acquisition financing in recent quarters, Konrad said.

"We are upgrading BAC ... based on strong capital, deposits and credit," analyst David Konrad said in a research note. "However, the main driver behind the upgrade is an expected inflection in 4Q24 net interest income."

Bank of America appears to be "closing the gap" toward its target to deliver a 15% return on tangible common equity (ROTCE), he said.

Bank of America has been reinvesting its cash flows into higher-yielding available-for-sale (AVS) securities and selling longer-term held-to-maturity (HTM) assets, he said.

Bank of America has about $97 billion in bonds maturing in the next four years, including $23.3 billion in 2025 and $26.9 billion in 2026, according to data from BondCliQ Media Services. (See chart below)

With jitters around regional banks continuing due to commercial real estate exposure, Bank of America has become more attractive to customers.

"We expect continued deposit market share gains for BAC based on its scale, product depth and relative 'safe haven' status," Konrad said. "We continue to view BAC as one of the top names in our coverage from acredit perspective with a high quality corporate book and under indexed exposure to commercial real estate."

Bank of America's loan book has a 7 % exposure to commercial real estate, which is well below the 14% figure for large-cap banks, he said.

-Steve Gelsi

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06-14-24 1212ET

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