America’s second-largest bank by assets, Bank of America Corporation (BAC), is mired in a scandal involving double-dipping on fees imposed on customers with insufficient funds in their accounts, withholding reward bonuses that were promised to credit card customers, and misappropriating sensitive personal information to open accounts without customers’ knowledge or permission.
The Consumer Financial Protection Bureau (CFPB) director Rohit Chopra said, “Bank of America wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent. These practices are illegal and undermine customer trust. The CFPB will be putting an end to these practices across the banking system.”
The bank has been ordered to pay $250 million in fines and refunds, with the CFPB and the Office of the Comptroller of the Currency (OCC) saying that BAC has violated several laws since 2012. While the CFPB ordered BAC to pay $100 million to the affected customers and $90 million in penalties, the OCC ordered BAC to pay a penalty of $60 million. The $250 million in fines and refunds will pressure the company’s near-term financials.
This is not the first time that U.S. regulators have fined BAC. In 2014, the bank was fined $727 million for “illegal credit card practices.” In May 2022, the CFPB ordered the bank to pay a $10 million civil penalty over unlawful garnishments, and additionally, it was fined $225 million by the CFPB and OCC last year automatically and unlawfully freezing customer accounts with a fraud detection program during the pandemic.
Since the bank was ordered to pay the penalties and refund, the stock has gained marginally. However, the stock has lost year-to-date and over the past year.
Looking at BAC’s recently reported financials, the Global Wealth and Investment Management segment’s revenue declined 3.5% year-over-year to $5.24 billion for the second quarter. The segment’s net income declined 15% year-over-year to $978 million due to the global slowdown in the deal-making business.
For the quarter that ended June 30, 2023, BAC’s EPS and revenue beat the consensus estimates. The bank has set aside $602 million as a provision for credit losses.
Here’s what could influence BAC’s performance in the upcoming months:
Robust Financials
BAC’s net interest income for the second quarter ended June 30, 2023, increased 13.8% year-over-year to $14.16 billion. Its return on average assets came in at 0.94%, compared to 0.79% in the year-ago period. The company’s net income applicable to common shareholders rose 19.7% year-over-year to $7.10 billion. Its EPS came in at $0.88, representing an increase of 20.5% year-over-year.
Mixed Analyst Estimates
Analysts expect BAC’s EPS and revenue for fiscal 2023 to increase 5.3% and 5.5% year-over-year to $3.36 and $100.14 billion, respectively. Its EPS and revenue for fiscal 2024 are expected to decline 2.4% and 0.7% year-over-year to $3.28 and $99.47 billion, respectively.
Mixed Valuation
In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.
On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.
Mixed Profitability
BAC’s 11.02% trailing-12-month Return on Common Equity is 1.1% lower than the 11.15% industry average. Likewise, its 0.90% trailing-12-month Return on Total Assets is 20.2% lower than the 1.12% industry average.
On the other hand, the stock’s 30.28% trailing-12-month net income margin is 17% higher than the industry average of 25.87%.
Bottom Line
BAC has been previously fined for other illegal practices, but the bank managed to navigate the rough waters, growing from strength to strength. Although its revenues and net income from the Global Wealth and Investment Management segment took a hit in the second quarter, the bank managed to beat Wall Street EPS and revenue estimates.
Although the penalty and refund of $250 million might dent its financial performance over the next quarter, it is unlikely to affect its financials significantly. Moreover, BAC was left with $106 billion in paper losses at the end of the second quarter due to its decision to invest heavily in the U.S. government bonds market. The amount is significantly higher than its peers’ unrealized bond market losses.
Given its mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.
