Summary
- Bank of America flew past the 2020 Stress Test with plenty of capital survive a severely adverse economy.
- The bank can absorb a hypothetical $71 billion in losses and still maintain a CET1 ratio of 9.0%.
- The stock trades at only 1.2x TBV and offers less risk than some of the other large bank stocks.
The bank sector, including Bank of America (BAC), has failed to keep up with the stock rally due to fears over loan losses. The sector is trading at book values comparable to the lows of the prior decade despite easily surviving the recent Fed stress test. Upcoming Q2 results will focus investors are large credit losses, but the investment thesis remains highly bullish on BoA with the 3% dividend yield and limited risk to the long-term business model.
Image Source: BoA website
Limited Risk
While the banks caused the 2008 financial crisis, the large financials have very limited risk of material damage this crisis. Even under the severely adverse economic situation of the Fed with 10% unemployment, the Dow dipping 50% and real estate prices collapsing, BoA ends the crisis with a strong capital position.
The bank started the stress test period with CET1 at 11.2%. BoA is predicted to end the period with this capital ratio at 9.0% and a low during the cycle of 8.5%.
