BAC Bank of America
The price gap narrowed, but 1.4x book still prices in returns above BAC's 11.5% normalized ROE.
The story
Bank of America has an elite, low-cost deposit franchise and scale in consumer, wealth, and markets, and its balance sheet is well capitalized. Its trailing ROE of 11.5% is in line with through-the-cycle levels and is not a peak. Credit costs are still benign, and the long-dated securities book remains a drag on rate sensitivity. The stock fell from 62.68 to 56 without any change in fundamentals, so it now trades at about 1.4x book (39.6 per share), down from about 1.6x.
No new facts justify changing any driver. Trailing ROE of 11.5% matches my normalized estimate, and revenue growth of about 6% supports roughly 5% book growth in year 1 after buybacks, falling to 4% in the terminal period, below the 5.11% risk-free rate. Beta of 1.15 sits just above the 1.1 industry anchor because of the bank's leverage and rate duration, and the 1.2% failure probability reflects its G-SIB capital buffers.
Value drivers
| Return on equity (normalized) | 11.5% |
| Book-value growth (Y1) | 5.0% |
| Terminal book growth | 4.0% |
| Beta | 1.15 |
| Failure probability | 1.2% |
| Cost of equity | 10.3% |
Valuation bridge
| PV of excess returns | 24.38B |
| PV of terminal excess | 31.14B |
| Equity value | 328.77B |
| ÷ shares → per share | $47.02 |
News
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Projected excess returns on equity
| Yr | Book equity | ROE | Excess return | PV |
|---|---|---|---|---|
| 1 | 277.25B | 11.5% | 3.36B | 3.04B |
| 2 | 291.11B | 11.5% | 3.53B | 2.90B |
| 3 | 305.35B | 11.5% | 3.70B | 2.76B |
| 4 | 319.93B | 11.5% | 3.87B | 2.62B |
| 5 | 334.86B | 11.5% | 4.06B | 2.49B |
| 6 | 350.12B | 11.5% | 4.24B | 2.36B |
| 7 | 365.68B | 11.5% | 4.43B | 2.23B |
| 8 | 381.53B | 11.5% | 4.62B | 2.11B |
| 9 | 397.64B | 11.5% | 4.82B | 1.99B |
| 10 | 413.98B | 11.5% | 5.01B | 1.88B |
Key risks
- A normal credit cycle (consumer cards, commercial real estate) pushes ROE below 10%
- Lower rates compress net interest income, or deposits reprice faster than expected
- Higher capital requirements (Basel endgame, G-SIB surcharge) cut buybacks and lower ROE
Catalysts
- Loan growth and repricing of fixed-rate assets lift net interest income
- Final capital rules come in lighter than feared, freeing excess capital for buybacks