Bank of America Stock Can’t Escape the Malaise of the Banking Sector

Stocks to sell

Bank of America (NYSE:BAC), arguably Warren Buffett’s favorite bank stock, surged 43% in 2019 as investors applauded the bank’s conservative management and better-than-expected quarterly results. Lately, though, the banking sector and Bank of America  stock can’t catch a break.

This Record Rally in BAC Stock Is Just Heating Up

Source: Michael Vi /

Recent notes to clients from UBS, Baird, and Keefe, Bruyette & Woods (KBW), among others, argue that bank stocks are running out of gas in 2020 after a solid run in 2019. They are sending up a laundry list of red flags which investors would be foolish to ignore.

UBS analyst Saul Martinez and his team spoke of the need for investors to show “greater selectivity” in 2020 in buying bank stocks than they did in 2019. UBS wound up slashing its ratings on both BAC stock and JPMorgan (NYSE:JPM) stock to “neutral” because it thinks that “valuations now incorporate the persistence of historically elevated profitability levels.” 

According to Baird’s David George, things are “getting weird out there” in the banking sector, and investors should avoid chasing individual stocks and trim their bank stock holdings. He has a “hold” rating on Bank of America stock. On Jan. 9, DA Davidson initiated coverage of Bank of America stock with a “neutral” rating.

Analyst Brian Kleinhanzl and his colleagues at KBW also think that the party is over for bank stocks. In a December note, they stated that “bank balance sheets remain strong and capital return continues to support earnings growth, but we do not see the group outperforming without a stronger economic backdrop forming or new catalysts emerging.”

Some analysts argue that BAC stock will buck the gloomy predictions about the banking sector when it reports earnings on Jan. 15. The shares are currently trading at a 6% discount to analysts’ average 52-week price target of $37. Wall Street analysts, on average, predict that BAC earned a per-share profit of 68 cents on revenue of $22.39 billion  last quarter.

Barclays Sees “Substantial Improvements” at BAC

In a recent note upgrading Bank of America stock to “overweight,” Barclays analyst Jason Goldberg argued that investors do not fully appreciate recent technology advances by BAC and the “substantial improvements” at Bank of America’s consumer bank, its largest revenue source.

KBW was impressed with BAC’s Q3 results, noting that its loan volume had grown a better-than-expected 6%, compared with the previous quarter. The firm believes that BAC’s loan growth slowed to 5.4% last quarter.

BAC’s net interest income (NII), another key metric, declined less than KBW had expected and proved “more resilient in the (fourth) quarter than many management feared initially,” KBW says. Even so, the firm’s lack of enthusiasm for the banking sector is palpable. KBW has a “market perform” rating on Bank of America stock.

“There is the potential for cost savings announcements at earnings and that would be positive, but we continue to believe that 2020 will be a year where Universal Banks will have to manufacture earnings growth against a flat yield curve, and banks that can do that are expected to outperform at earnings,” the firm stated.

The Bottom Line: Take a Pass on Bank of America Stock

Expectations for BAC are low. Analysts, on average, think its revenue fell 2.2% in Q4 and expect it to be flat in 2020. Meanwhile, BAC stock price is trading at a premium to its rivals such as Goldman Sachs (NYSE:GS), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM). That premium doesn’t appear to be justified. In other words, whatever “special sauce” BAC possesses isn’t enough to overcome the sluggish fundamentals of the banking sector. At least that’s the case for now.  That’s why investors should avoid BAC stock.

As of this writing, Jonathan Berr doesn’t own any shares of any of the aforementioned stocks.

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