Bank of America turns bullish on Fed rate hike expectations

On January 17th , we forecasted an uptrend in the stock of Bank of America (NYSE: BAC) and recommended purchasing a high option contract with expiry date falling on March 24th . The stock rose as expected and the suggested trade ended in profit.

Last week, the stock hit a new one year high of $25.80. Notably, the stock made a positive gap opening on March 1st .

However, there are little chances of closing the gap at this point in time as the fundamentals favour further upside in the stock as explained below.

The main reason for the stock to rally last week was the hawkish statement issued by the New York Federal Reserve President William Dudley and San Francisco Fed president John Williams.

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Even Fed Chair Janet Yellen reiterated the need for normalization of rates over the course of 2017. Following the statement, the odds of a rate hike in March have increased to 98%, from about 35% a week before. A rate hike would considerably increase the top line and bottom line of the Bank of America. The bank, which has the second largest assets in the US, is expected to rake in a additional net interest income of $600 million from the 25 basis point hike announced in December.

The North Carolina-based bank, in its regulatory filing, has provided a detailed assessment of net interest income sensitivity (page 84) to change in interest rates.

According to the filing, the net interest income would rise to as much as $3.37 billion for a 100 basis point rate hike. Now, if the US Fed proceeds with three rate hikes as planned, then it would almost increase the Bank of America’s net interest income by about $2.5 billion.

The stock currently trades at 1.3 times tangible book value. Historically, the stock used to trade roughly at 2 times tangible book value. The forward PE ratio of the bank is only 11.81 – lowest among top tier banks. The PEG ratio is only 1.52.

The dividend yield of the stock is 1.18% per share. Thus, considering the fact that the bank has no major legal cases pending against it, analysts believe that the bank may increase dividend payout soon as the profits would be on a rise. Thus, considering the future growth prospects and the rising interest scenario, we anticipate the stock to stay in the bullish orbit in the near-term.

The price chart shows a major and minor support for the stock at 22.80 and 24.50. The positive reading of the MACD histogram indicates that the stock is in the firm bull grip. So, a trader can expect the stock to move northwards and into uncharted territory soon.

Considering the low risk, it would be prudent to invest in a call option at this point in time. The option should be picked only when the stock trades near $25. The binary trader should also allow an expiry period of one week for the contract.