Is Bank of America Stock a Good Buy After Third Quarter Earnings?

The second-largest U.S. bank performed better than expected, led by investment banking revenue.

Banks have performed better than anticipated so far in the third quarter, and that includes Bank of America (NYSE:BAC).

The country’s second-largest bank beat revenue estimates in the quarter, generating $25.3 billion in revenue. That was up slightly from $25.2 billion in the same quarter last year. It also surpassed consensus estimates of $25.2 billion.

Net income fell 11% year over year to $6.9 billion, or 81 cents per share, but was slightly better than median estimates of 76 cents per share.

It wasn’t a spectacular quarter by any means, but the stock was up about 2% on the day, trading around $42.75 per share. Should Investors Consider Bank of America Stock a Buy After Third Quarter Results?

Interest income down, investment banking up

Typically, rising interest rates are good for banks, because the higher the rates, the more income banks can generate in interest income.

But this cycle has been different, because rates rose so high, so fast, that banks had to quickly raise their deposit rates as well, particularly after the banking crisis of 2023. The banking crisis caused several banks to fail, in part , due to massive deposit withdrawals. Therefore, to avoid losing deposits, banks had to increase deposit rates, perhaps more than they wanted. This, in turn, has dented interest income and profits.

We saw that again in the third quarter, as Bank of America saw a 3% decline in net interest income (NII) to $14 billion. Given that NII represents about 55% of Bank of America’s total revenue, that’s a significant hit.

However, Bank of America has been able to surpass that in other areas through its diversity of revenue streams. Its Global Markets business, which covers institutional trading, saw revenue rise 14% to $5.6 billion. Additionally, revenue rose 8% to $5.8 billion at its wealth and investment management arm, which includes Merrill Lynch’s brokerage business. These two lines of business were boosted by the bull market, which has raised asset levels and inflows.

And while the Global Banking segment saw revenue fall 6% to $5.8 billion, investment banking revenue soared. Bank of America generated $1.4 billion in investment banking fees, ranking third among all banks in the quarter. That represents an 18% increase from the third quarter of 2023. However, gains in investment banking were offset by revenue declines in commercial banking, due, in part, to a drop in NII.

“We believe our diversified business is a source of strength, helping us deepen relationships with existing clients and develop new ones over time,” said Bank of America CFO Alastair Borthwick.

Should you buy Bank of America stock?

Bank of America has had a good year of recovery, with its share price up about 26% so far this year. Investors who bought the bank’s stock in late 2023 when its P/E fell below 10 were rewarded with solid returns.

However, is Bank of America still a good buy at this slightly higher valuation, trading at nearly 15 times earnings?

I think he still has some challenging times ahead. Although interest rates are falling, it may take a while before you can properly adjust deposit rates and maximize your NII. However, lower rates should lead to more borrowing, so increased lending activity will help.

The bank also faces the prospect of a slower-growing economy, which could lead to weakening credit quality and higher provisions for credit losses. Additionally, market growth is expected to be moderate, which could impact wealth and investment management. However, a better market for investment banking should offset any potential losses elsewhere.

I certainly don’t think Bank of America is a bad investment right now. Its valuation remains decent, and the stock could see limited growth. But don’t expect the kind of returns you’ve seen this year.