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Bank of America stock forecast: Looking past coronavirus to a digital future

By Hermione Taylor

Edited by Jekaterina Drozdovica


Updated

Bank of America stock forecast

Bank of America stock news 

The past eighteen months have proved difficult for Bank of America (BAC). Rising unemployment and a brief recession in 2020 hit confidence, leading to lower demand for loans and credit card borrowing. Coupled with low interest rates, banks struggled to generate interest income on what loans they did make. 

Despite these challenges, Bank of America’s third-quarter results revealed total revenues of $22.8bn, up 20% on a year earlier, driven largely by deposit growth and higher loan balances as the US economy recovers. Net income was also up 58% from a year ago, reaching $7.7bn or $0.85 a share. 

Bank of America stock is trading at almost double its share price over the year to date (21 October), at around $47 per share. Some analysts have even pushed their Bank of America share price forecast through the $50 barrier – a level not seen since before the financial crisis of 2007-2008

Bank of America stock price history

Bank of America shares have been on the ascent this year, but there have been plenty of bumps along the way. 

BAC stock price chart 2016-2021

Coming into 2020, Bank of America shares were trading at around $35 a share, but fell as low as $20 as it became clear that the coronavirus pandemic was going to have a significant economic impact.

Banks initially feared the kinds of loan losses last seen in the 2007 financial crisis, as closures linked to the pandemic threatened mass consumer and business loan defaults. The US Federal Reserve (Fed) temporarily relaxed regulatory requirements on banks, and encouraged them to dip into their liquidity buffers and increase lending as the pandemic hit. 

The CARES Act, introduced in March 2020 also offered extended unemployment benefits, business loan guarantees and small business loans. These measures, along with a wider economic stimulus package, meant that the huge loan losses banks feared were largely avoided.

BAC stock value recovered over the course of 2020, and it ended the year at just under its pre-pandemic level of around $30. This year has seen peaks and troughs, with the second half of the year seeing the share price topple from around $43 to $37, before rebounding to a post-pandemic high of around $47 following the announcement of strong third-quarter results. 
 

Bank of America stock analysis

Bank of America’s key income driver continues to be its Consumer Banking business. This generated a net income of $3bn in Q3 2021, as consumer deposits passed the $1tn mark for the first time. 

The company generates earnings per share of $0.85 per diluted share on revenue of $22.8bn, and a dividend yield of 1.81%.

Increased interest rates 

With the Fed looking likely to increase interest rates by 2022, many analysts anticipate an even more profitable period for Bank of America ahead. 

As interest rates increase, banks can typically profit by taking advantage of the spread between the interest they can earn themselves and the lower rate they can pay to customers with savings accounts. 

“Should this take place, that will help benefit the bank's net interest margin, which is equivalent to a gross profit margin for an industrial company,” wrote Gerard Cassidy, head of US banks strategy at RBC Capital Markets. “So as the net interest margin rises due to a steepening curve, that will increase the revenue growth for the banks.”

Reserve releases

As economic stimulus largely kept loan losses at bay, US banks have found themselves with comfortable capital buffers. After passing stress tests earlier this year, banks began to release some of the reserves they had held over the past 18 months. 

Bank of America announced a $2.2bn reserve release in the second quarter of 2021, which significantly boosted earnings, though analysts were initially unsure how much further scope there would be for third-quarter releases.

“Better-than-expected loan losses are also providing a tailwind this quarter with Bank of America’s quarterly provision for credit losses creating a benefit of $624mn, reflecting a reserve release of $1.1bn,'' said Victoria Scholar, Head of Investment at Interactive Investor.

Digital technology 

There is also optimism that Bank of America’s commitment to digital banking could give it a strategic advantage over its competitors.

An analysis of post-pandemic shopping trends by Strategy Advisers, Oliver Wyman, found that Gen Zers and Millennials are more likely to use digital banks, with 21% using a digital banking platform, compared to 3% of those aged 55-64. 

As these younger customers move into their high earning years, banks with advanced digital platforms could be well placed to benefit.  

“This past year digital capabilities were more important than ever to our clients,” said David Tyrie, head of digital at Bank of America in February 2021 – 70% of US customers used some form of digital banking. Bank of America’s Q3 earnings report revealed digital users were up 4% (1.6 million) from a year ago.

Wage costs

For banks, wages are a big cost of doing business. Bank of America has 213,000 employees and is facing pressure on wages across the board. For branch staff, a minimum wage increase has seen hourly pay rise for all workers to at least $21, with plans to hike it to $25 by 2025.

Banks are also under pressure to retain their best front office staff. Speaking at the 2021 Global Financials CEO Conference in September, Moynihan stated: “I think there's a good war for talent out there, as you’re well aware, and that then drives the cost when you're 60% people cost. So you have to win the war on talent, which we do.” 

This was echoed in a recent briefing from Ernst & Young (EY), which stated that “the lure of Big Tech and other digital organizations is something all banks are competing against when trying to coax the best data and analytics talent to their traditional risk functions”.

Third-quarter compensation and benefits costs were $8.7bn in 2021, compared to $8,2bn in 2020 and $7.8bn in 2019. 

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Leadership 

Additionally, leadership could prove a longer-term downside risk for Bank of America. The Bank has been led by Chief Executive Brian Moynihan since 2010, and he recently confirmed his intention to serve as chairman and CEO through this decade, leading the Financial Times to dub him a “forever CEO” as his tenure stretches towards 2030. 

During his tenure the Bank of America share price has increased by almost 160%, and his experience leaves him well placed to manage such a large and complex organisation. On the other hand, corporate governance experts argue that a long CEO tenure can carry risks, leaving leaders less able to respond to new challenges. 

There is also the possibility that potential successors can grow impatient and move elsewhere, meaning key talent is lost. 

In September, Bank of America announced the departure of three senior executives. This could mean that the bank struggles to replace Moynihan when the time eventually comes. 

BAC stock price under CEO Brian Moynihan

Macroeconomic performance

Bank of America remains vulnerable to a faltering economic recovery. Bank stocks move cyclically, as the demand for their services (loans, mortgages and credit cards) tends to increase alongside higher economic activity.

“We reported strong results as the economy continued to grow and our business regained the organic customer momentum we saw before the pandemic,” said Moynihan in the Q3 earnings report, highlighting his bullish tone. 

As well as a strong performance on the consumer banking side, Bank of America saw investment banking fees rise by 23% to $2.2bn, following record levels of advisory fees. 

Could there be storm clouds on the horizon? The most recent US jobs report raised questions about the speed of the recovery, with unemployment still sitting around pre-Covid levels. 

There is also the issue of higher interest rates. Though these should in theory mean higher margins for Bank of America, it relies on businesses and customers continuing to take out loans. 

A period of high interest rates coupled with slow growth and rising inflation, or stagflation, could see demand for loans stalling. There is even a risk of loan defaults if interest rates push monthly payments to unaffordable levels. 

“You would have a lot of worries about the businesses and consumers not being able to pay back their debt in a rising interest rate environment” Laith Khalaf head of Investment Analysis at AJ Bell told capital.com. “Some analysts may argue the number of debt defaults is going to rise.”

Though higher interest rates offer higher potential margins, they also represent a key downside risk to Bank of America’s stock performance. 

Bank of America stock forecast

Analysts have rated Bank of America stock as a consensus ‘buy’, with 14 ‘buy’ ratings, 6 ‘hold’ and 1 ‘sell’, according to the data from MarketBeat. BAC stock predictions for the next twelve months vary widely from the low of $30 to the high of $51.

CHART

Of the seven analysts that covered Bank of America this month, six boosted price targets, with the average now sitting at $43.66. Wolfe Research’s Steven Chubak was bearish on the share before the Q3 earnings report, and downgraded it to a ‘market perform’ rating on October 13th. 

But several other investment research firms are bullish on Bank of America, and have increased their BAC stock projections since the Q3 earnings report was released. Evercore ISI boosted its target price from $43 to $48, and Royal Bank of Canada increased their target price to $50, giving the stock an ‘outperform’ rating. 

Goldman Sachs and Oppenheimer have joined them in increasing their target to the $50 threshold, a level that has almost symbolic importance: the Bank of America share price has not breached $50 since the financial-crisis hit in late 2007. 

Note that predictions are often wrong. You should always conduct your own research before making any investment or trading decision.

Bank of America stock price targets

Bank of America’s history

The Bank of America Corporation (BAC) is an international investment bank and financial services holding corporation. It is one of the Big Four banking institutions of the US, along with JPMorgan Chase (JPM), Citigroup © and Wells Fargo (WFC). Ranked the second biggest bank holding company in the US and the eighth largest bank in the world, Bank of America provides its services to more than 66 million customers worldwide. In 2020, it was ranked 25 on the Fortune 500 list.

Bank of America shares are listed on the New York Stock Exchange (NYSE) under the ticker symbol BAC. The company is a constituent of both the S&P 100 Index and the S&P 500 Index.

During the 2008 global financial crisis, Bank of America made two costly and controversial acquisitions – Countrywide Financial and Merrill Lynch & Co. The corporation subsequently received large sums of US government aid but then faced several state and federal lawsuits amid claims that it had misled investors. A record settlement of $16.65bn was reached in August 2014.

Bank of America operates in the consumer banking, global banking, global markets, global wealth and investment management segments. Working with individuals, large and small businesses, big corporations and governments, the company offers a range of investing, banking, asset and risk management services and products to its clients.

FAQs

Is BAC stock a good buy?

Bank of America stock - buy or sell? Analysts have rated the Bank of America stock as a consensus ‘buy’, with 14 ‘buy’ ratings, 6 ‘hold’ and 1 ‘sell’, according to the data from MarketBeat. BAC stock predictions for the next twelve months very widely from the low of $30 to the high of $51.

Note that predictions are often wrong. You should always conduct your own research before making any investment or trading decision.

How high can Bank of America stock go?

Goldman Sachs, Royal Bank of Canada and Oppenheimer have all upgraded their price targets for Bank of America to hit the $50 mark, a level not seen since the financial crisis hit in 2007. 

Note that analyst predictions are often wrong so you should always conduct your own research before taking any investment or trading decision. And never invest money you cannot afford to lose.

Why has the Bank of America stock price been going up?

The stock may have been boosted as the Bank of America reported strong third-quarter results. Total revenues jumped 20% from a year ago to $22.8bn, driven largely by deposit growth and higher loan balances as the US economy recovers.

Net income was also up 58% on a year earlier, reaching $7.7bn or $0.85 per share. These results exceeded many analyst’s expectations, and the stock has seen its price target upgraded as a result. 

Note that analyst predictions are often wrong so you should always conduct your own research before taking any investment or trading decision

How can I buy Bank of America stock?

You can buy Bank of America shares using stock broking services. The stock is listed at the New York Stock Exchange (NYSE) under the ticker “BAC”.

How often does Bank of America stock pay dividends?

Bank of America pays dividends quarterly. In 2021, it announced that it expected to increase its quarterly dividend by 17%, to $0.21 per share. The first increased dividend payment under this scheme was made in September 2021.

Read more: Lenovo stock forecast: will the stock rebound after secondary listing failure?

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