Bank of America Corp. largest financial company
Bank of America Corp. is the guru's second-largest holding and is the largest financial company owned by Berkshire Hathaway as well. It proved to be a star performer in 2019.
Even on the back of a 43% gain last year and the declining interest rate environment, shares still seem to be an attractive investment for 2020.
Consistently beating analyst estimates for earnings per share was at the core of the bank's stellar performance in 2019. It is expected to report fourth-quarter 2019 earnings on Jan. 15, and these numbers will likely set the tone for Bank of America's performance this year.
According to Priti Dhanuka, an analyst at Zacks covering the financials sector, Bank of America is likely to post another earnings surprise this Wednesday. Even though the Federal Reserve decided to cut rates three times in 2019, Dhanuka believes the slowly but steadily growing U.S. economy more than offsets the negative impact of declining policy rates by enabling the bank to win new customers and attract deposits while being able to grow its loan portfolio.
According to third-quarter filings, Bank of America had a Tier 1 common equity capital ratio of 9.7, whereas the minimum requirement is 4.5 according to the Basel III stipulations. The bank has been careful to maintain high Tier 1 capital because this helps in the approval of its buyback programs as well.
Data from the Federal Deposit Insurance Corp. revealed that Bank of America has the highest market share among deposit takers in the U.S. for the 12 months ended on June 30. Average deposits grew on a year-over-year basis in the third quarter of 2019 as well, despite the massive size of the bank.
Management said in the third-quarter earnings call that deposit growth at Bank of America has been consistently higher than the industry average for many years, which is something that will likely continue in the future.
Generally, interest rate cuts are seen as an obstacle for banks since net interest margins tend to compress in such an environment. However, as evident from the chart below, Bank of America's net interest margins compressed by a negligible amount, resulting in higher earnings based on its loan portfolio growth.