Low cost deposits, rising interest rate keeps BoA bullish

The Bank of America (NYSE: BAC), the second largest bank by assets in the US, reported lower than anticipated fiscal 2016 fourth-quarter revenues. However, that did not deter the stock from recording a new 12-month high of $23.41. One of the main reasons for the share price to remain bullish is the 46.75% y-o-y increase in the fourth-quarter 2016 earnings. The future growth prospects of the bank have brightened up as explained below. Thus, we are bullish on the stock of the Bank of America.

The North Carolina-based bank reported fiscal 2016 fourth-quarter revenues of $19.99 billion, compared with $19.582 billion in the similar period of 2015. The Q4 revenues were lower than analysts’ estimates of $20.85 billion.

For the fourth-quarter, the bank reported earnings of $4.335 billion or $0.40 per share, up from $2.954 billion or $0.27 per share in the prior year’s corresponding quarter.

CNBC

The bank has some unique positive aspects that make it more attractive to investors. First of all, the Bank of America has extremely low-cost deposits. This offers a great deal of advantage to fuel growth and improve profitability. In the past few years, the low interest rate scenario hampered the growth of the bank to a great extent. After announcing a rate hike in December, the Fed has outlined its intention to tighten monetary policy in the current year as well. Low-cost deposits coupled with rising interest rates would boost the bank’s profitability.

The US economy is also showing firm signs of growth. This would naturally increase the demand for funding. At the end of the fourth-quarter, the bank had about $64 billion available readily for lending. The balance increased $28 billion in the fourth-quarter alone.

The bank has ambitious plans to increase its revenues in a considerable manner in the years to come. At the same time, Bank of America also aims to bring down the expenses to $53 billion in 2018, down $2 billion from the amount spent in 2016. Through a combination of bigger loan portfolio, increase in revenues from higher interest rates, and decrease in expenses, Bank of America hopes to achieve a profit of $25 billion per year. Thus, considering the advantageous position of the bank, we have a bullish view of the stock.

The price chart indicates that the buyers continue to support the stock at 22.50 levels. The positive reading of the rising MACD indicator shows a build-up of momentum in the stock. Thus, a further increase in the stock price can be expected.

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