Bank of America

Bank of America reported third-quarter results that fell slightly short of expectations, even after excluding the impact of a one-time regulatory fine, with adjusted earnings per share of $1.08 and net revenue of $29.96 billion, below our forecasts of $1.21 and $30.19 billion, respectively.

Why it matters: Coming off a record-breaking second quarter, the capital markets slowdown was evident across all the major trading desks, though Bank of America's results were more tepid, coupled with the announcement of a $1.2 billion regulatory fine. Expectations were tempered after management at a recent conference alluded to this quarter's trading revenue likely to be flat from a year ago, but sales and trading revenue ended up contracting 5%, while JPMorgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley grew 15%, 6%, 37%, and 24%, respectively. The US Department of the Treasury's Financial Crimes Enforcement Network assessed Bank of America with a $1.2 billion fine related to deficiencies in its anti-money laundering compliance program. Management noted the fine is a one-time expense, and the consent order poses no material business constraints.

The bottom line: After digesting the results, we are lowering our fair value estimate for wide-moat Bank of America to $62 from $66, while still viewing shares as undervalued, even after updating our forecasts to account for lower near-term markets revenue and higher deposit costs. Our revised markets revenue forecasts still call for elevated levels to persist near-term, followed by a reset that we currently estimate to occur in 2028. While we lowered near-term trading revenue estimates across the board, we note that Bank of America exhibited both slower equities growth and larger fixed income declines than its peer set this quarter. The additional rise in deposit costs is tied to faster commercial deposit growth than consumer, which are aggregately more yield-sensitive, as we enter a higher rate environment.

The $1.2 billion regulatory fine assessed by the US Department of the Treasury's Financial Crimes Enforcement Network is inclusive of the $750 million civil money penalty assessed by the US Office of the Comptroller of the Currency, resulting from the bank's deficient and ineffective Bank Secrecy Act/anti-money laundering, or BSA/AML, compliance program. The fine effectively served as a non-tax-deductible regulatory settlement that management noted resolves monetary penalties owed to regulators from the 2024 consent order. The two consent orders have strong overlap, both requiring a look-back and a transaction-monitoring validation order, which we interpret to imply that future remediation expenses associated with updating the compliance systems are likely to remain similar. Management further solidified this takeaway by noting that work on resolving this compliance issue began back in 2024, with the ongoing technology and personnel expenses associated with remediation already included in the current run-rate expense base, in addition to noting that there are no limiting constraints on the business associated with the consent order, such as the asset cap that was implemented on Wells Fargo in 2018.

Given that the current expense base, excluding the one-time regulatory fine, already includes the ongoing costs associated with remediation, we believe that investors can view this as a clear opportunity to drive further positive operating leverage in the future, as these expenses should largely dissipate after the orders are fully resolved. Though we note that the exact timeline of resolution is presently unclear, the notion that these costs have been in the expense base for the prior two years indicates the introduction of a catalyst for improved profitability in the future, even if difficult to accurately time at current. Looking across each of the segments in isolation, we noted sequential improvements in the efficiency ratio across all but global markets, which is to be anticipated during a quarter with declining market revenue due to the large portion of fixed costs associated with the trading business, demonstrating continued execution toward improving profitability through the cycle across the less cyclical business lines.

Though the magnitude of the $1.2 billion fine catches the eye, we note that it presents minimal impact to shareholders, as it represented just 11.8% of operating income generated during the quarter and 0.6% of tangible common equity. We believe the selloff tied to this news is overblown and offers a strong entry point for long-term investors.

We are lowering our fair value estimate for Bank of America to $62 $per share, down from $66, as our revised forecasts now incorporate higher near-term deposit yields, lower markets revenue. Our fair value estimate translates to a price/earnings ratio of 13.1 times and 11.9 times our forecast earnings in 2026 and 2027, respectively. Further this translates to a price-to-tangible book value of 2.2 times our forecast year-end 2026 tangible book value.

Consistent with other major financial institutions in our coverage, the primary drivers of Bank of America's valuation remain asset growth, the trajectory of its net interest margin, and the continued expansion of its core fee-earning businesses, particularly in wealth management, global banking, and trading.

Digging into the drivers underpinning our forecast of 4.5% annualized growth in fee income over the coming decade, we see a stronger revenue-generating runway in the GWIM segment. Our relatively tepid forecasts for net new asset flows of 2.1% over the upcoming decade, down from 4.1% in the trailing decade, still translate to 6.3% annualized revenue growth when married with our market growth forecasts, as we believe the firm will be able to avoid pronounced fee compression. Further, our revised investment banking and institutional trading forecasts translate to annualized growth rates of 2.7% and 2.3%, respectively. Though we believe the current backdrop of elevated asset levels and heightened uncertainty as the market continually repositions portfolios due to a rapidly evolving technological landscape, whereby artificial intelligence is developed and proliferated, in addition to heightened levels of global conflict and geopolitical tension, we still struggle to see why trading revenue should structurally outpace the broader economy.

Turning to the balance sheet, we view Bank of America as well postured to thrive in a higher rate environment, with our estimates calling for net interest income growth of 8.0% and 10.2%, respectively. Even after forecasting a rate cutting cycle to begin in 2028, we believe Bank of America is well-insulated to navigate these headwinds through earning asset growth and the redeployment of legacy securities currently trapped at low yields, calling for net interest income growth of 3.1% in 2028. This resilient positioning in 2028 is primarily due to the firm's outsize exposure to long-duration securities and mortgages initiated in at low yields during the pandemic, which should be methodically reinvested at higher yields over time. Further, updated risk weights from the Basel III Endgame re-proposal, particularly within residential real estate, will enable Bank of America to support its lending portfolio with slightly less common equity Tier 1 capital, improving the return profile.

Finally, expenses have been another key concern for Bank of America, particularly as costs rose at an elevated rate in the postpandemic years, though we believe we are in the midst of an inflection point that points to slower expense growth on a go-forward basis as the Cash Pro and Erica platforms transition from development to maintenance mode, culminating in noninterest expenses growing at an annualized rate of 3.3% over the next 10 years. Given our solid revenue growth outlook and cost discipline, we expect Bank of America to beat a 58% long-term efficiency ratio, in line with its moaty bank competitors, despite operating with a significantly higher mix of investment banking and wealth management.

We assign Bank of America a Morningstar Economic Moat Rating of wide, based on durable cost advantages and switching costs across its consumer and commercial banking franchises, in addition to switching costs in its wealth management business. Average returns on tangible common equity, or ROTCE, of 12.8%, relative to our 8.9% estimate cost of equity, over the past decade corroborate our view, despite being weighed down by an ill-timed 2020-21 purchase of long duration held-to-maturity, or HTM, securities. We estimate this depressed the five-year average efficiency ratio and ROTCE by roughly 150 and 160 basis points, respectively, a drag that will continue to fade as the portfolio rolls off and the balance sheet grows.

Bank of America exercises its cost advantages by pulling the operating-efficiency lever rather than the funding-cost lever, generating a particularly strong efficiency ratio despite deposit betas and overall funding costs roughly in line with peers. The firm’s business mix makes traditional efficiency-ratio comparisons imperfect as wealth management, investment banking, and institutional trading generate 46.3% of net revenue, versus 10.2% for our regional banking coverage, but after controlling for mix, we estimate the 2025 efficiency ratio would have been 56.8%, roughly 390 basis points better than our regional average and likely to improve further as the HTM portfolio drag abates. The scale of the enterprise fractionalizes fixed technology, branch, and compliance costs across complementary business lines, evidenced by preprovision net revenue per risk-weighted asset among the highest in our coverage. Further, fee-based businesses like wealth management and investment banking also require less capital than spread-based net interest income, and cross-selling into them via commercial and retail relationships lowers customer acquisition costs.

The consumer banking segment gathers nearly 48% of consolidated deposits, versus 28% of loans, funding higher-yielding lending and securities elsewhere in the franchise. Competition for primary banking relationships is driven more by service quality—fraud prevention, app functionality, branch/ATM proximity—than by yield, and Bank of America has proven adept at winning them. The firm serves as the primary bank for 92% of its consumer clients, and 71% of credit-eligible checking clients hold a Bank of America card, providing valuable payment data to target cross-sell offers at opportune times. Branch and deposit market share within a metro area typically move roughly in tandem until a high-single-digit share threshold, after which deposit growth turns exponential relative to branch growth, driving positive operating leverage, and Bank of America's $566 million in deposits per branch, roughly double our coverage average, reflects this dynamic. On switching costs, just 7% of US banking customers switch primary providers annually, implying a roughly 14-year customer life industrywide, while the firm's rewards-platform clients show a 94% primacy rate and 99% retention, implying a customer life exceeding 20 years even after a material haircut to retention. The segment has generated an 18.6% ROTCE over the past decade, among the strongest in our coverage.

The global wealth & investment management segment holds $2.18 trillion in assets under management and $3.17 trillion in brokerage client assets. Wealth management carries structural, dual-sided switching costs: advisors are reluctant to move because roughly 19% of client assets don't follow them to a new firm (Cerulli Associates), while clients build deep, trust-based relationships with advisors who guide them through market volatility and major life events—retirement, divorce, a business sale, an inheritance—and craft personalized plans around bespoke risk and income needs that make advisor performance particularly difficult to benchmark. We believe relationship pricing across the consolidated platform drives inflows and reinforces the segment’s scale, but our view is slightly tempered by average net new asset flows of a modest 4.1% over the past decade, likely masking meaningful advisor-attrition outflows toward the registered independent channel. Still, the segment has generated a strong 16.6% ROTCE over the past decade.

The global banking segment pairs one of the strongest US commercial banking franchises with a top five investment bank, with commercial relationships serving as a foot in the door for investment-banking deal flow. Cost advantages stem from shared digital infrastructure—cloud, cybersecurity, and data processing—amortized across roughly 70 million consumer and 40,000 corporate clients. For example, the same core security framework and data lake that power digital retail banking also process $450 trillion in annual corporate payments, letting the firm undercut peers that must pay third-party vendors for comparable technology. Switching costs differ by client size. Middle-market clients face workflow lock-in from proprietary portals or feeds embedded in treasury operations, and loss of a data-backed credit history if they leave that results in higher borrowing costs with a new institution. Large corporates face data degradation from bank-specific reconciliation nomenclature and lose the benefits of multicurrency notional pooling and intraday sweeping that only a single-bank ecosystem can provide. The institutional trading business is not stand-alone moatworthy, but it provides product and service options that bolster the commercial and investment banking franchises.

Taken together, we view Bank of America as a wide-moat franchise with durable cost advantages in consumer and global banking and switching costs across consumer banking, global banking, and GWIM, forming an ecosystem whose intersegmental synergies, from cross-sold products to fractionalized fixed costs, make the whole greater than the sum of its parts.

Increased adoption of CashPro could make it the default choice for middle-market treasurers, providing greater access to operational cash and high-margin fee revenue.

A structural shift in the macroeconomic environment may lead to a prolonged, steeper yield curve, providing a tailwind to net interest income as the bank’s low-yield HTM securities mature.

Increased adoption of Erica for mass affluent wealth and consumer banking clients could lead to even more pronounced operating efficiency improvement.

If the energy spike from early 2026 leads to long-term stagflation, net charge-offs could spike dramatically.

The continued push toward Erica advice for mass affluent clients could decrease migration toward traditional wealth advisors.

Increased proliferation of fintech platforms that pay higher yields on deposits could increase funding costs for all banks even higher than we forecast.