Bank of America (BAC) Analysis: Potential Growth and Future Valuation

In this analysis of Bank of America Corporation (NYSE:BAC), we evaluate the bank’s potential growth and future valuation based on the most recent data available, particularly focusing on Q1 2024. Our previous assessment rated the stock as a buy, with a fair price target of $39.41 and a future price of $67.80. Since then, the stock price has climbed from $33.40 to $34.70.

Based on the updated information, we maintain our buy rating for Bank of America, with a revised fair price estimate of $47.30 and a future price target of $59.66. These targets suggest a near-term upside of 36.4% and a projected 12% annual return throughout 2029. Although the 12% annual return is slightly above the market’s historical performance of 10.45%, the 36.4% upside (fair price adjustment) offers an attractive opportunity.

Growth Plan

Bank of America plans to expand its presence in the US by opening new financial centers in various states, adding a total of 37 new locations. This expansion plan, set to be completed by 2026, should enhance the bank’s reach across the country.

Comparison to Peers

Bank of America exhibits strong deposit coverage, with enough money to cover approximately 63% of its deposits. However, it falls slightly behind in debt coverage, able to cover around 1.74 times its total debt, which is still sufficient. The bank’s 11.06% share of total US deposits is second only to JPMorgan, while ahead of Wells Fargo.

Industry Outlook

The US Traditional Banking Market is expected to grow at an annual rate of 1.44% through 2028, with global investment banking projected to grow at 1.4% annually over the same period. Bank of America has an addressable revenue of around $1.43T, expected to rise to $1.56T by 2028. Additionally, Bank of America can access $120.96T in wealth management, which is set to grow to $158.71T by 2028.

Valuation

Using a Residual Earnings model, we calculate a required rate of return of 11.72% based on a CAPM model, with a risk-free rate of 4.639%, a beta of 1.22, and a market risk premium of 5.811%.

Revenue projections account for expected interest rate fluctuations, and net income margins are based on historical data. The model calculates a fair price of $47.30, representing a 36.4% increase over the current stock price of $34.70, with a future price target of $59.66, translating to annual returns of around 12%.

Risks

Risks to our thesis include potential underperformance of the new financial centers and the impact of monetary policy on profitability. Accurately predicting interest rate changes is crucial for assessing future performance.

Conclusion

Bank of America is positioned for strong near-term growth, offering a substantial upside of 36.4%. The future price target of $59.66 indicates an annual return of 12%, slightly higher than the historical market average. Overall, Bank of America remains an attractive buy opportunity based on the current valuation and potential for future growth.