Bank of America's (BAC -0.13%) business transformation since the depths of the financial crisis has been simply remarkable under Brian Moynihan's leadership. The bank went from one of the institutions whose viability was being questioned to a leaner institution with excellent asset quality, a focus on efficiency, and industry-leading technology. And investors who bought during the turbulent times have been handsomely rewarded. Over the past 10 years, Bank of America has delivered a staggering 820% total return, and investors who bought during the worst points of the financial crisis have done even better.
However, many analysts still refer to Bank of America's stock as "cheap," and for good reason. With several catalysts that could drive profits higher in 2022 and beyond, could Bank of America, which currently trades for about $49, reach $100 within the next year?
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Some major catalysts could add to the bank's bottom line
There are some pretty compelling tailwinds that could push Bank of America's profits higher in 2022. Interest rates and inflation are perhaps the most important for investors to understand.
Let's start with interest rates. The Federal Reserve now appears set to start raising interest rate in 2022 in an effort to keep inflation in check, and investors are expecting at least three 25-basis-point rate hikes according to the futures market, with a high probability of four or more. This would translate into higher lending interest rates for banks in general, and with high proportion of non-interest-bearing deposits, Bank of America would be a bigger beneficiary than most. In fact, the bank estimates that a 100-basis-point increase in the overall interest rate yield curve would translate into $7.2 billion in additional net interest income per year.
Then there's inflation. Not only does elevated inflation typically lead to rising interest rates, but it also means that consumer prices rise. This means not only do consumers pay higher interest rates, but the average amount they need to borrow to fund a new car, home, or other purchase will increase as well.
One caveat to watch is that rising consumer interest rates can reduce consumer spending and other economic activity, and if rates spike too high this is definitely something to keep an eye on. But with consumer interest rates near all-time lows, there should be plenty of room to rise before it has any significant effect on spending.
Pandemic-era growth in the business could drive profits even higher
Over the past couple of years, bank investors have been worried about the potential effects of the COVID-19 pandemic on the business, such as loan defaults and foreclosures. And fortunately, it looks like the banking industry has been able to avoid any truly adverse scenarios.
On the other hand, it's been easy to overlook some of the positive statistics and strong results that have come during the past two years. For example, the average checking account balance at Bank of America is now 40% higher than it was in the third quarter of 2019. Digital sales (such as customers obtaining a loan online) are 33% higher than pre-pandemic levels. And Bank of America has increased its investment banking market share by 60 basis points to 6.9% compared to pre-pandemic times.
In short, Bank of America is heading into 2022 with its business in excellent condition, and in an even better position than before to benefit from a strong economy.
Could $100 happen in 2022?
To be sure, I think Bank of America will be a $100 bank stock in the not-too-distant future, but within the next year could be a bit of a stretch. The Fed isn't expected to raise interest rates that much in 2022, and while consumer interest rates are likely to be higher a year from now, there's not much reason to believe they will spike higher to the point where they could double the bank's profitability.
Whether Bank of America hits a triple-digit share price this year or not, the fact remains that there could be some pretty big tailwinds pushing profits higher in 2022 and beyond, and Bank of America could indeed be a bargain at the current levels.
