Bank of America (BAC 0.95%) recently disappointed the market with its first-quarter earnings report as the stock fell 3.5% in a day. The nation's No. 2 bank by assets beat Wall Street estimates but reported a decline in net interest income due to higher deposit rates.
Overall deposits were down 7%, and charge-offs were up 26% from the previous quarter to $1.5 billion. This shows that the bank's loan portfolio appears to be weakening.
However, at least one Wall Street analyst sees a silver lining to the update. In the wake of the first-quarter report, Wolfe Research gave Bank of America an upgrade, from peer perform to outperform, with a price target of $42, implying a 14% gain in the stock.
Image source: Bank of America.
Wolfe Research says Bank of America is a buy
Wolfe acknowledged that the bank could face some headwinds from a "higher-for-longer" interest-rate regime after comments from Fed Chair Powell indicated that rates could remain elevated. However, the analyst expected net interest income to soon hit an inflection point and for Bank of America to stop underearning and move closer to the sector average for the net interest margin.
Does BofA have upside?
The bank finished the quarter with net interest income of $14 billion, down 3% from a year ago, but CEO Brian Moynihan predicted that net interest income would hit a low point in the second quarter and then start to grow in the second half of the year. Management also said that its losses in office loans, which led to the growth in charge-offs, were front-loaded and should decline in the second quarter.
Moynihan has proven to be a good steward of Bank of America. If his forecast is correct, the stock should continue its trend higher from earlier this year. Barring a recession or another economic shock, BofA looks like a good bet to deliver solid returns for investors.
