Banking On Bank Of America

Consumer Banking Drives Results For Bank Of America 

Results from the financial sector have been mixed this quarter but Bank of America NYSE: BAC stands out. The company’s focus on U.S. consumer banking and the interest rate environment has it set up for earnings growth and that is already being seen in the results. The company reported its Q1 earnings and beat the consensus by more than 500 basis points on strength in net interest income. Net interest income is being driven by continued growth in both loans and deposits and supported by what appears to be a relatively healthy consumer, as well as rising interest rates. 

"Net interest income increased by $1.4B versus the year-ago quarter supported by strong loan and deposit growth," said Chief Financial Officer Alastair Borthwick. Going forward, and with the forward curve expectation of rising interest rates, we anticipate realizing more of the benefit of our deposit franchise.

Bank of America Puts In A Bottom 

The financial sector and Bank of America entered correction on fears of inflation, slowing growth, and a weakened consumer but so far those fears have not played out. Bank of America’s Q1 results are strong enough that the market is putting in a bottom and it is one we think will result in a reversal. Bank of America reported $23.2 billion in net revenue for a gain of 1.7% over last year and beat the Marketbeat.com consensus by $0.110 billion or about 475 basis points. The gain was driven by a 13% increase in average deposits and an 8% increase in average loan and lease balance that aided net investment income. The company also reported some growth in most other segments with Global Banking and Global Markets being the only ones to post a decline. On the bottom line, the GAAP $0.80 beat by $0.05 

There have been no analysts’ commentaries since Bank of America released its Q1 results but they are on the way. Until then, the Marketbeat.com consensus rating is a Buy with a price target more than 30% above the current price action. Although the analyst's price targets softened a bit leading into the report, the consensus rating is up in the 12, 3, and 1-month comparisons and we think will trend higher over the next few months at least. The outlook for interest rate hikes is only getting more aggressive and that will ultimately drive earnings power for this bank. 

The Technical Outlook: Bank Of America Is Bottoming 

Price action in Bank of America began to bottom in early March and looks like they are completing the movement now. Price action slipped to the $37.50 level but buyers stepped in a drove it back up confirming support at the $38.00 level. This move looks like a Double Bottom to us and it is confirmed by the stochastic. The stochastic is showing a strong buy signal that will be confirmed if (when) price action moves higher. In that scenario, we see this stock moving up to the $41.20 level and then $44.00 where it will need to break above the baseline of the pattern to get any higher. A move above that level would be very bearish and may come later in the year if the FOMC doesn’t spark a recession and hard-landing when it begins to hike rates.