Time to buy Bank of America stock to get defensive
Shares of Bank of America Corp. got a lift, after analyst David Konrad at D.A. Davidson turned bullish, saying he believed the bank will outperform its peers during the economic weakness brought on by the COVID-19 pandemic.
In a note titled "Time to Get Defensive," Konrad raised his rating to buy from neutral. While the outlook for BofA isn't exactly rosy, as the decline in interest rates and reduced economic activity will likely lead to lower capital markets revenue and higher credit costs, Konrad said he preferred BofA in the current environment because a relatively high proportion of its investment-banking revenue was tied to investment grade debt underwriting.
"Since the 2008 crisis, [Bank of America] has outperformed peers in terms of meaningfully reducing balance sheet risk, particularly mortgage related credit risks and credit card risk," Konrad wrote in a note to clients. "As a result, we believe [Bank of America's] stock will outperform peers now trading below [tangible book value]."
The stock BAC, +4.04% surged 4.0% to $20.57, to outperform the 2.5% gain in the SPDR Financial Select Sector exchange-traded fund XLF, +2.50% and the Dow Jones Industrial Average's DJIA, +2.24% 470-point, or 2.2% rise. See Market Snapshot.
He expects net interest income to fall 10% this year to $44.4 billion as a result of falling interest rates, and sees total credit costs growing to $8.6 billion in 2021, which is more than double the $3.5 billion in 2019. The costs include his assumption that credit card costs will increase to 6.50% in the second quarter of 2021 from 3.07%.
And exposure to the energy sector, which has been weighed down by the recent plunge in commodities prices - crude oil futures prices CL00, 7.504% hit an 18-year low earlier this week - represents 2% of loans.
Still, Konrad lowered his 2020 earnings estimate to $2.22 a share from $2.95 and his 2021 forecast to $2.40 a share from $3.25, leading to a cut in the stock price target to $24 from $36.
That comes as the Federal Reserve has lowered its target on the benchmark fed-funds rate by 1.5 percentage points in the past month to a range of zero to 0.25%.
During the time, the yield on the 10-year Treasury note TMUBMUSD10Y, 0.594% has dropped from 1.088% on March 2 to 0.614% in afternoon trading. See Bond Report.
Meanwhile, Konrad downgraded Goldman Sachs Group Inc. GS, +3.19% to neutral from buy, saying the broker doesn't typically thrive in an environment of widening credit spreads, lower valuations and deleveraging from hedge funds.
"The markets don't like uncertainty, which has led to nearly a shut down in capital markets, leading to a potential downdraft in investment banking revenues for certainty the next few quarters but perhaps even longer for [merger and acquisition] revenues given the time lag between announcements and closings," Konrad wrote.
In comparison, Goldman's investment banking revenue in 2019 made up 21% of total revenue, while BofA's total investment banking fees represented just 6.2% of its total revenue.
Year to date, BofA's stock has lost 41.6% and Goldman shares have shed 34.8%, while the financial ETF has declined 34.9% and the Dow has dropped 25.0%.