Digital Investments And Capital Returns Will Enhance Future Operational Efficiency

Key Takeaways

• Expected growth in net interest income and strong fee growth in wealth and global markets suggest potential revenue and earnings increases.
  
• Investment in digital services and significant capital returns to shareholders may improve margins and drive future earnings per share growth.
  
• Slower growth and rate uncertainties threaten Bank of America's future revenues and earnings, while digital expansion's potential is capped by existing adoption levels.

Catalysts

Through its subsidiaries, provides banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, large corporations, and governments worldwide.

• Bank of America expects net interest income (NII) to grow in the coming quarters, even in the face of anticipated rate cuts. This is due to the repricing of fixed-rate assets into higher-yielding ones, indicating potential revenue growth.
  
• The bank continues to see strong year-over-year fee growth in its Wealth and Investment Management business and its Global Markets businesses, driven by increases in sales and trading revenue and brokerage fees, potentially boosting future earnings.
  
• Organic growth in consumer banking with net new checking accounts and increases in digital engagement indicate potential for future revenue increases and efficiency improvements, impacting net margins positively.
  
• Investment in digital capabilities and the expansion of online banking services have led to high levels of digital engagement among clients, which could enhance customer experience and reduce operational costs, thereby improving net margins.
  
• Bank of America is returning significant capital to shareholders through share buybacks, with $5.6 billion returned this quarter. This could drive earnings per share (EPS) growth in the future if continued.

Bank of America Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bank of America's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.2% today to 26.6% in 3 years time.
• Analysts expect earnings to reach $30.2 billion (and earnings per share of $4.15) by about December 2027, up from $21.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $34.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2027 earnings, down from 15.8x today. This future PE is greater than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 1.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Bank of America Future Earnings Per Share Growth

Risks

• The current economic environment is characterized by slower growth and falling inflation, which might negatively impact future revenue growth prospects for Bank of America.
  
• Uncertainty around interest rates and potential rate cuts can impact net interest income, with significant fluctuations likely to affect future earnings.
  
• While consumer credit quality remains strong, increasing borrowing costs for small and medium-sized businesses could lead to a slow uptake in commercial loans, affecting overall loan growth and net margins.
  
• Expense growth driven by sales and trading incentives and investments may impact net margins if the anticipated fee-based revenue growth does not materialize.
  
• While digital expansion is emphasized, the high level of existing digital adoption raises questions about further incremental revenue growth opportunities in this area.

Valuation

• The analysts have a consensus price target of $49.13 for Bank of America based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $57.0, and the most bearish reporting a price target of just $39.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $113.4 billion, earnings will come to $30.2 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 7.1%.
• Given the current share price of $45.05, the analyst's price target of $49.13 is 8.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.