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Alan Farley
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BAC

Bank of America Corp. (BAC) sold off despite beating Q2 2020 estimates last week and is now trading just 6 points or so above March’s 3-year low. Revenue fell 3.5% year-over-year to $22.3 billion while credit loss provisions rose to $5.1 billion, which includes a $4.0 billion reserve build for future bad loans as a result of the COVID-19 pandemic. Net interest income fell 11% due to lower rates that have made it harder for commercial banks to book consistent profits.

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Bank Of America Sector Headwinds

Rivals haven’t fared much better during earnings season, with shareholders walking away from banking stocks, due to growing fears about a protracted recession that dampens business activity for months to come. 2019’s historic drop in bond yields stoked growing sector headwinds, which have escalated to hurricane force due to the Federal Reserve’s multi-trillion dollar stimulus program, which has raised the specter of negative interest rates.

DA Davidson analyst David Konrad highlighted banking industry challenges when he downgraded Bank of America earlier this month, lowering his price target from $27 to $25. He noted the company’s strong balance sheet and comparatively low risk profile but warned those risk constraints could undermine quarterly results. He also stressed collapsing LIBOR spreads in the adverse rate environment, negatively impacting the sector’s net interest income outlook.

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Wall Street And Technical Outlook

Wall Street consensus currently rates the stock as a ‘Moderate buy’, computed from 5 ‘Buy’ and 5 ‘Hold’ recommendations. One analyst recommends that shareholders close out positions at this time. Price targets range from a low of $21 to a street high $41 while the stock is now trading less than $4 under the median $ 27.70 target.  The proximity of current price to the median and lack of bullish catalysts suggests limited upside potential.

Bank of America broke out above 2018 resistance in the fourth quarter of 2019 and topped out at a 12-year high in the mid-30s in December. It’s been all downhill since that time, failing the breakout during the first quarter rout. The stock has booked limited upside in the last 4 months while accumulation has barely budged. None of this bodes well for the technical outlook, raising odds the stock will test the downtrend low in coming months.

 

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