Bank of America (BAC -0.21%) has long been one of America's largest financial institutions and a core holding in Warren Buffett's portfolio. The stock is currently the second-largest position in Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) portfolio, Buffett's holding company.
Buffett made the call for Berkshire to buy this stock back in 2011, but investors still have a great opportunity to accumulate shares today to take advantage of future growth. The economic landscape in America isn't perfect, but a few factors could benefit Bank of America's bottom line and your portfolio.
Here are three reasons Bank of America might be a table-pounding buy today.
1. Consumers are borrowing
Business is booming for Bank of America. You can see below that consumer borrowing in credit cards and personal loans, vehicles, and mortgages are near all-time highs. Inflation is raising prices, which is driving up borrowing. This is reflected in the lender's operating results; Bank of America's consumer lending segment grew its revenue by 15% year over year in the second quarter.
US Total Revolving Credit Outstanding data by YCharts
It's not all good; too much borrowing can increase the risk of defaults, and the bank loses money when people don't pay their loans. The bank's provision for credit losses more than doubled in Q2, to $1.1 billion from $500 million a year ago. It's something to keep an eye on, but total profits (net income) grew 19% year over year in Q2.
2. Higher rates mean higher profits
The Federal Open Market Committee has steadily raised the federal funds rate to bring inflation down over the past 18 months. Generally, banks thrive in a higher-rate environment because it gives them more wiggle room to profit on their loans. This shows up in the net interest income, which is the difference between what Bank of America is bringing in via interest on its loans versus what it pays in interest on its deposits.
BAC Net Interest Income (TTM) data by YCharts
You can see that net interest income has soared since the Fed began raising its rates. It's important to remember that the Fed has aggressively raised rates, and it could partially contribute to an eventual recession. Recessions are bad for banks because people borrow less, and defaults could increase. However, Bank of America is one of the world's largest banks with a high-quality asset base. It's well-equipped to handle the economy's ups and downs.
3. The price is right
Shares of Bank of America currently trade at a price-to-book (P/B) ratio of 0.89, about 10% below its average over the past decade. While that alone may not seem like a huge deal, the company now enjoys the highest rates in years, creating arguably the most friendly operating conditions.
BAC Price to Book Value data by YCharts
One could argue that the bank's rapidly growing profits (net interest income grew 14% year over year in Q2) and the discounted valuation combine for an appealing investment idea. Banks always carry some risk because they're sensitive to the economy, but it's hard not to like what Bank of America offers investors at this price.
