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Should You Buy Bank of America Hand Over Fist Now? There is one good reason to think twice.

Vaseline 2 months ago

This leading bank has just reported its latest financial results.

bank of America (BAC 3.35%), one of the largest banks in the world, just reported its first quarter 2024 results. Both key figures, revenue of $25.8 billion and diluted earnings per share of $0.76, exceeded average analyst expectations. This could be reason enough for shareholders to welcome the news.

This top financial stock has been on an impressive run, rising 35% in the past six months. You might be wondering if you should buy Bank of America outright right now. It may make sense to ride the momentum.

But you might want to think twice before you do that. This is why.

The challenges of banking

At a high level, a bank pays interest on its deposits while at the same time earning a return on the loans it makes. The difference, known as net interest income (NII), is an important metric for a bank. Investors want to see this number increase over time because it demonstrates good risk management and the ability to successfully lend and price credit.

Despite beating analyst expectations on the top and bottom lines, Bank of America’s NII fell 3% year-over-year to $14 billion in the first quarter. The weakness of this important figure shows how difficult the current interest rate environment is for banks.

On the one hand, they have to pay depositors more or risk losing them to the competition. The company’s savings interest rate is still well below the national average.

But at the same time, banks are not seeing strong demand from borrowers to take out loans, against the backdrop of higher interest rates. Bank of America’s average loans and leases rose just 1% in the first quarter compared to the first quarter of 2023, which didn’t offset deposit growth. As a result, the company is coming under pressure where it matters most.

The Federal Reserve originally planned to make several interest rate cuts this year. However, inflation appears to be persistent. What if the central bank is forced to leave interest rates at their current levels for longer to curb rising prices across the economy? The pressure on Bank of America’s NII could be a trend that will continue for the foreseeable future, at least until rates start to fall. But who knows when that will be?

For what it’s worth, two company rivals, JPMorgan Chase And Citi Group, posted a year-over-year NII jump. To be fair, each of these money center banks have diversified business models and variations in what their largest revenue sources are. Nevertheless, it further points to Bank of America’s problems.

Buffett will hold it forever

Even taking into account what I argued above, some investors might find Bank of America an attractive investment opportunity. The shares trade at a price-to-book ratio that is below its three-year average.

Berkshire Hathaway owns 13.1% of the outstanding shares, which amounts to 10.2% of the conglomerate’s investment portfolio. The big Warren Buffett could view Bank of America as a forever position, especially considering how essential banks are to the functioning of our economy. There will always be a need for the products and services they offer. Additionally, Bank of America has successfully weathered previous economic downturns.

However, I don’t feel comfortable having a company that is gaining experience cyclicity similar. It adds risk to the portfolio, especially since no one can accurately predict when recessions will occur or how severe they will be. It’s a struggle to time the market correctly.

I would like to report this situation. Investors should be careful.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have no positions in the stocks mentioned. The Motley Fool holds positions in and recommends Bank of America, Berkshire Hathaway, and JPMorgan Chase. The Motley Fool has a disclosure policy.