Bank of America: Buy, Sell, or Hold?

Bank of America (BAC 0.12%) reported mixed 2024 fourth-quarter financials. Revenue missed Wall Street estimates by more than $1.5 billion, while adjusted earnings per share of $0.70 beat consensus forecasts. The business continues to navigate the challenging macro landscape.

Before making a decision about the company as it relates to your portfolio, like whether it’s a buy, sell, or hold, it’s worthwhile to look at both the bull and bear cases for this top bank stock.

A top Warren Buffett stock

Berkshire Hathaway, the conglomerate headed by Warren Buffett, owns numerous stocks. But Bank of America is currently the second-largest holding. The Oracle of Omaha has long been an investor in banks, so the fact that he owns this one is a major endorsement that should give individual investors confidence.

One of the key likely reasons Buffett has a massive stake in Bank of America is because of its economic moat. This partly stems from the company’s huge scale and brand recognition, which make it easy to attract deposits and sell loans.

Plus, as is the case with most financial institutions, Bank of America also benefits from switching costs. Its customers aren’t likely to change to competing products and services no matter how enticing, given the burden this would cause.

The possibility of rate cuts by the Federal Reserve could provide a near-term tailwind for Bank of America in that demand from borrowers for loans could rise. And this could lead to greater net interest income, while simultaneously helping control default rates.

Bank of America would also be positioned to gain from a boost in consumer spending. The latest quarter saw credit and debit card spending rise by 3%, a figure that could expand if the economy gets on stronger footing.

Still a banking institution

While the possibility of a more accommodative macro environment can help this business, the current situation isn’t as beneficial. And this points to the cyclical nature of Bank of America’s operations. If rates stay higher for longer, it could be a headwind.

In the latest quarter, net interest income declined 5% because of rising deposit costs that weren’t fully offset by the higher yields on Bank of America’s assets. Even more alarming, the company’s net charge-offs soared 73%, versus Q4 2022. A recession would make matters worse.

Bank of America has tremendous scale, easily making it a leader in the banking industry, but the competition is intense. And this won’t change anytime soon. There are an unlimited number of rivals, all fighting to bring in deposits or approve more loans. And in Bank of America’s case, it faces stiff competition in other areas like its capital markets and wealth management operations.

The financial services offered by this bank are really just commoditized products at the end of the day, making it difficult to differentiate what BofA offers compared to other large banks. And with the onslaught of fintech enterprises all focused on providing superior user experiences, people have far more choices when picking where to bank. This will make things tougher for Bank of America going forward.

Investing perspective

It’s important to consider Bank of America’s current valuation. As of this writing, shares trade at a price-to-earnings ratio of 10.7. This is lower than Citigroup, but a premium to JPMorgan Chase and Wells Fargo (as of Jan. 24). Therefore, I view Bank of America as being fairly valued on a relative basis right now.

There are valid reasons for investors to want to either buy (and hold) or sell this stock. It all depends on what factors you find most compelling. In my opinion, the bear arguments above hold more weight, so I’m not adding this stock to my portfolio at this time.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.

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