Bank of America Stutters (NYSE: BAC)

Shares of Bank of America NYSE: BAC appeared to be taking a break yesterday from the decent rally higher they’ve been making in recent months. The company released their Q4 earnings before yesterday’s session and despite the headline numbers beating analyst expectations, shares gapped down on the open and traded off Tuesday’s close by as much as 3% at one stage.

In stark contrast to JPMorgan NYSE: JPM who can boast 8% growth in their revenue year on year, Bank of America’s revenue contracted by almost 2%. Net income was down compared to last quarter with fingers being pointed at the low-interest rate cycle that we’re in as the culprit. However, Bank of America isn’t the only bank stock facing that headwind. Analysts appear to be lukewarm on Bank of America going into 2020, with the stock garnering 5 upgrades and 5 downgrades in recent months. This luke-warmness, in tandem with mediocre numbers, seems to be giving Wall Street pause for thought.

It should be no surprise to see that while JPM’s stock is soaring to fresh highs and has left 2008’s levels well behind it, BAC stock still has to reclaim that lost territory and is still proving to Wall Street it has what it takes to do so. However, posting contracting revenue numbers while some of your peers are almost in double-digit percentage growth isn’t going to inspire many investors.

Were we to see a rise in interest rates in the coming years, BAC investors would be breathing a sigh of relief. Approximately 50% of the company’s revenue comes from net interest income. With spreads as tight as they are, they’re being squeezed harder than most financials and it’s showing in their quarterly numbers.

Struggling With Low-Interest Rates

Paul Donofrio, the bank’s CFO, said as much with the release: “The company managed well through a period of transition from rising rates to lower rates over a short period of time. Solid client activity in growing loans and gathering deposits helped us offset spread compression. We also are aided by diverse lines of business and operations, with noninterest income comprising nearly half of our revenue.”

But this still means the pressure is on management to find efficiencies elsewhere until rates are rising again and to reduce the company’s dependence on net interest income as a major revenue source in the meantime.

Second Best?

Like many of its peers, BAC stock traded sideways in 2018 before taking a beating at the end. It was only this past November when shares were able to get back above the previous post-2008 high. It’s hard to believe that the stock was down 95% during the dark days of 2009. The 1300% rally in the decade since then still leaves them about a 50% move away from printing fresh all-time highs and Wednesday’s numbers suggest it may be a while yet before that happens. Just like many of their financial peers, BAC offers a steady dividend of around 2% but for investors looking for capital appreciation, there are other options out there to keep in mind.

JPM is plowing ahead with strong fundamental and technical momentum behind them and are far and away from the best performing of the big financials in recent years. To be fair, when comparing that group’s stock performance from 2011 onwards, BAC is the closest contender to JPM while the likes of Citi NYSE: C, Goldman Sachs NYSE: GS and Wells Fargo NYSE: WFC are languishing well behind both.

Investors will be pleased that the company beat analyst expectations but there surely has to be some worry about their ability to keep expanding even when interest rates are low. Given the trouble the Federal Reserve has had with meeting its inflation goals, not to mention its determination to avoid a recession, it could be years before we enter a rising interest rate cycle.