Consolidation In The Banking Sector Will Increase Revenues

Key Takeaways

• As one of the "Big 4" U.S. banks, BAC has demonstrated resilience during the last  sector turmoil, maintaining a strong brand and market presence.
• Despite economic uncertainties, BAC boasts a resilient loan book and solid profit margins, which should help it navigate potential challenges.
• BAC’s valuation remains attractive relative to peers, but the broad sector is vulnerable to swift interest rate changes.
• Other risks include regulatory pressures, economic downturns, and potential shifts in investor sentiment due to Buffett's ongoing divestment.

Company Catalysts

Warren Buffett's  Reducing His Stake

Buffett's Berkshire Hathaway has been a major shareholder in BAC, and his actions often influence market sentiment. Buffett’s initial BAC investment in 2011 was a high-yielding preferred stock deal, which he later converted into common shares at a favorable valuation. His subsequent purchases in the $30 range created a distinct pricing gap, with older holdings significantly cheaper than newer ones.

Recently, Buffett has been reducing his position in BAC, selling shares at a measured pace. This trend could indicate that he is selectively selling higher-basis shares to manage tax implications while retaining a significant portion of his holdings for long-term dividend income.

If Buffett maintains his remaining BAC position akin to his long-term holdings in Coca-Cola and American Express, it would reinforce confidence in the bank’s ability to generate shareholder returns. However, if he accelerates selling, it could trigger investor concerns over BAC’s future profitability and competitive positioning.

Digital Transformation and Market Share Growth

Bank of America has been investing heavily in its digital banking platform, which has shown steady growth. The bank's consumer banking segment reported a 4% year-over-year increase in digital sales, now representing 51% of total sales. Active mobile banking users have also grown, reaching 36.3 million in Q1 2023.

If BAC continues expanding its digital offerings and improving customer engagement, it could capture a larger market share, particularly among younger, tech-savvy consumers. 

This digital growth could lead to increased deposits, higher lending activity, and improved efficiency, which would positively impact BAC's financial performance.

Solid Net Interest Income and Lending Expansion

Despite sector-wide challenges, BAC has demonstrated resilience, benefiting from strong deposit inflows and loan growth. The bank’s total deposits reached a record $1.97 trillion, supporting lending activity across commercial and consumer segments.

Investment banking revenue surged 44% year-over-year in Q4 2024, contributing to robust overall performance. Furthermore, BAC’s NII remained stable despite rate cuts, declining only 1.5% for the full year but rebounding 2.9% in Q4. Management projects record NII in 2025, anticipating further expansion as lending activity accelerates.

This positions BAC favorably in a “higher-for-longer” rate environment. Should the Federal Reserve maintain elevated interest rates, BAC can benefit from improved margins and continued deposit strength. However, a sudden shift toward aggressive rate cuts could pressure NII and compress profitability.

Industry Catalysts

Erosion of truInterest Rate Environment and Net Interest Income Growth

The current interest environment is a double-edged sword for banks. Higher interest rates positively influence net interest income (NII) – which is a key profitability driver for banks like Bank of America (BAC). The Federal Reserve's cautious approach to rate cuts in 2025 suggests that interest rates may remain elevated. Yet, rising interest rates erode the market value of bank assets, creating unrealized losses, which Barron’s recently named “the largest in the industry” for BAC.

Regardless of that risk, deposits have proved resilient. While smaller banks saw significant deposit outflows during a 2023 banking turmoil, larger institutions benefited from a flight to safety. This trend has reinforced the dominance of major banks, positioning them for continued deposit growth and lending expansion.

A Better Regulatory Environment and Competitive Positioning

A reduction in regulatory pressure under the current administration could boost large bank’s net incomes. Lower compliance costs, fewer financial penalties, and eased capital requirements would improve profitability, allowing banks to return more capital to shareholders.

This trend would be particularly beneficial for banks that can reallocate these savings toward growth initiatives or shareholder returns.st in banks and financial institutions

The recent past has seen troublesome events in the banking sector as rapidly rising interest rates pressure banks like the Silicon Valley Bank– causing their balance sheets to deteriorate and fuel bank runs.  Although BofA is a far better-managed institution, it still suffers from negative sentiment due to this bias just like other big banks, which are becoming “even bigger to fail.” BofA has outperformed its peers but still underperformed the broad market in 2023 so far. I believe the negative sentiment around banks at the moment has been overdone on the likes of BofA, and this stock will likely re-rate higher when the dust has settled.

Interest rate impact

If the US economy continues to recover and interest rates rise above the current 5-5.25% rate, then Bank of America should expect to see a significant increase in net interest income. Although interest rates have been low recently, their historic average since the 1970s is close to 5.5%.

This rise would result in greater revenues and earnings for big banks, and may also help to offset any potential declines in non-interest income. Additionally, if banks like BofA are able to maintain a strong loan portfolio and keep credit losses low, this should further support their financial performance.

Recession impact

Recessions are usually negative for the banking sector as lower interest rates surpass bank earnings and force them to focus on unpopular non-interest income like fees, service charges, etc. If the market turmoil forces the FED to pivot and start cutting rates, this development could negatively impact the banking sector.

Risks to My Thesis

Positive Risks to my Neutral Thesis

Trump’s Economic Boom: If the US Economy grows more than anticipated, BAC could see higher load demand, increased consumer spending, and improved investment banking revenues. This could lead to stronger-than-expected revenue and earnings growth for BAC.

Trump’s Financial Deregulation: Reducing regulatory pressure under the current administration could lower compliance costs and financial penalties, boosting BAC's net income. This scenario would be particularly beneficial if the bank could reallocate these savings toward growth initiatives or shareholder returns.

Buffett’s Influence: If Buffett halts selling and retains his remaining BAC stake, it would signal confidence in the bank’s long-term potential. This development could counter negative investor sentiment and reinforce BAC as a stable, dividend-generating asset.

Negative Risks to my Neutral Thesis

Economic Downturn or Recession: An economic downturn or sharp interest rate cuts could compress BAC’s margins. A recession would reduce loan demand, increase credit losses, and weaken overall profitability. If the Fed moves aggressively to lower rates, BAC’s NII could face significant pressure.

Increased Regulatory Scrutiny: A shift toward stricter capital requirements, increased scrutiny over lending practices, or renewed political hostility toward large banks could impact BAC’s profitability. While deregulation appears favorable in the near term, any reversal could create headwinds.

Buffett’s Exit: Berkshire has sold plenty of stock, but still remains the largest individual shareholder, owing 8.94%. However, the share is now under 10% and it doesn’t require a 48-hour notice after selling but rather a periodical 13-F update. If Berkshire Hathaway offloads more BAC shares beyond the assumed high-basis tranche, it could indicate deeper concerns about the bank’s future, potentially triggering investor pessimism.

Assumptions

• I assume that interest rates in the U.S. will stay higher than historical averages, providing a tailwind for BAC's net interest income and overall profitability.
• I assume that the U.S. economy will remain stable, with no severe recession or economic downturn that would significantly impact BAC's loan book or credit quality.
• I expect BAC maintains its position as one of the dominant U.S. banks, benefiting from deposit stability and lending growth.
• I expect that Buffett’s BAC sales are primarily for tax efficiency, and that he retains a core stake for dividends.
• I expect regulatory pressures to remain moderate under the current administration, reducing compliance costs and capital constraints.
• I expect the economic growth to continue at a slow pace, without a significant positive catalyst.
• I forecast net interest income growth of 2.0% per year, supported by higher interest rates and loan growth. Non-interest revenue is expected to grow at 1.5% annually, driven by fee income and investment banking activities. Operating expenses are projected to decline by 1.0% per year due to efficiency improvements and digital transformation. This results in pre-tax income growing at 4.0% annually through 2030.
• I expect the buybacks to moderate, owing to liquidity management and regulatory considerations. By FY 2030, I expect a 1% annual reduction in shares outstanding, with 7.5 billion shares by 2030.
• I assume a P/E ratio of 11x, which is in line with median historic expectations.
• I assume a net income growth of 5.5%, owing to NII growth of 2%, non-interest growth of 1.5%, cost management savings of 1%

Valuation

• By FY 2030, NII is projected to grow to $62.5 billion in FY 2024, growing at 2% per year.
• Non-interest revenue is expected to reach $49.5 billion by FY 2030, growing at 1.5% annually.
• Total revenue should grow to $112 billion by FY 2030, at 1.8% annually.
• Net revenue to grow at 5.5% - reaching $39.8 billion by FY 2030 ( FY 2024 x (1 + 0.55)6 = $39.8)
• The earnings-based valuation gives an FY 2030 market cap of $38.5 billion x 11 = $423.5 billion.
• Divided by 7.5 billion shares outstanding, it gives a price per share of $57.04.
• Discounted by Simply Wall St's 7.5% discount rate, it gives a present value share of $43.34.