Bank of America Corporation (NYSE:BAC) has seen its stock hit yearly lows, despite posting solid stress test results and announcing a dividend hike. The banking giant’s profitability is too strong to ignore, making it an attractive investment opportunity, especially with its dividend yield now surpassing 3%.
Under the severely adverse scenario presented in the 2023 Dodd-Frank Act annual stress test results, Bank of America would lose a combined $52.2 billion. However, even in this hypothetical situation where housing prices plummet by 38% and unemployment skyrockets to 10%, the bank still maintains a minimum Common Equity Tier 1 Capital ratio of 8.3%. In the worst-case scenario, the bank would still have a capital surplus of $139 billion.
Bank of America faces the challenge of having too much capital and the potential requirement to hold even more due to new Basel IV rules, despite the fact that large banks did not face significant issues during the recent regional banking crisis.
Interestingly, a significant portion of the losses projected in the stress test results include a $13.3 billion increase in the allowance for provision expenses. In other words, these losses have not actually been incurred yet.
To boost investor confidence, Bank of America recently raised its quarterly dividend by 9% to $0.24 per share. This move brings the dividend yield to 3.3%, the highest it has been in the last decade outside of the Covid-related market dip.
Even with the dividend hike, Bank of America’s payout ratio remains below 30%, indicating that the bank will generate more capital than it pays out in dividends. This excess capital can be used to strengthen the bank’s position or to repurchase its undervalued shares.
However, there is still a dispute between Bank of America and the Federal Reserve regarding the stress test results. While the bank disclosed the dividend increase, it did not provide any details on potential share buybacks.
In the previous stress test results, Bank of America had announced plans to utilize the remaining $17 billion from its prior share buyback program. The bank performed well in the stress test, with a significant increase in pre-provision net revenue and a decrease of 90 basis points in the stress capital buffer.
While some analysts have expressed concern about the discrepancy between Bank of America’s numbers and the Federal Reserve’s numbers, the overall consensus is that the results are positive.
Bank of America is set to report its second-quarter earnings on July 18, and analysts predict another strong quarter with a 10% increase in revenues to $25.0 billion and a 15% increase in earnings per share to $0.84.
Looking ahead, Bank of America may face a more challenging environment where revenues will no longer benefit from higher interest rates, while costs could rise. Fortunately, the bank ended the last quarter with excess deposits of $0.9 billion, so it is not expected to face significant issues related to increased deposit costs.
With a price-to-earnings ratio of 8.5x based on 2023 earnings estimates, Bank of America’s stock remains incredibly cheap. The market sentiment toward the stock seems overly negative, especially considering the attractive dividend yield it now offers.
In conclusion, Bank of America Corporation has successfully passed the 2023 stress test and remains a compelling investment opportunity. Once the concerns regarding capital levels are resolved, the bank is well-positioned to reward shareholders with strong capital returns. Additionally, investors can benefit from the current 3.3% dividend yield while awaiting further clarity on the situation.
