Is Bank of America stock a buy after Q3 earnings?

The second largest U.S. bank performed better than expected, led by investment banking revenue.

Banks have performed better than anticipated so far in the third quarter, and that includes Bank of America (NYSE:BAC).

The nation’s second largest bank topped revenue estimates in the quarter, bringing in $25.3 billion in income. That was up less slightly from $25.2 billion in the same quarter a year ago. It also beat consensus estimates of $25.2 billion.

Net income fell 11% year over year to $6.9 billion, or 81 cents per share, but it was a bit better than the 76 cents per share median estimates.

It wasn’t blowout quarter by any stretch, but the stock was moving about 2% higher on the day, trading at around $42.75 per share. Should investors view Bank of America stock as a buy after Q3 earnings?

Interest income down, investment banking up

Typically, rising interest rates are good for banks, because the higher the rates, the more revenue the banks can generate in interest income.

But this cycle has been different, because rates increased so high, so fast, that banks had to rapidly increase their deposit rates too, particularly after the 2023 banking crisis. The banking crisis caused several banks to go under, in part, due to runs on deposits. Thus, to avoid losing deposits, banks had to raise deposit rates, perhaps higher than they wanted to. This, in turn, has eaten into interest income, and profits.

We saw that again in Q3 as Bank of America experienced a 3% decline in net interest income (NII) to $14 billion. As NII represents about 55% of Bank of America’s total revenue, that’s a significant hit.

However, Bank of America has been able to overcome that in other areas through its diversity of revenue streams. Its Global Markets business, which encompasses institutional trading, saw revenue climb 14% to $5.6 billion. Further, revenue jumped 8% to $5.8 billion in its wealth and investment management arm, which includes the Merrill Lynch brokerage business. These two businesses lines were boosted by the bull market, which has raised asset levels and inflows.

And while the Global Banking segment saw revenue drop 6% to $5.8 billion, investment banking revenue soared. Bank of America generated $1.4 billion in investment banking fees, ranking third among all banks in the quarter. That represents an 18% increase over Q3 of 2023. However, the gains in investment banking were offset by revenue declines in commercial banking, due, in part, to a drop in NII.

“We believe our diverse business is a source of strength, helping us deepen existing client relationships and develop new ones, over time,” said Bank of America CFO Alastair Borthwick.

Should you buy Bank of America stock?

Bank of America has had a good bounce back year, with its stock price up about 26% year-to-date. Investors who jumped on the bank stock at the end of 2023 when its P/E ratio fell below 10 were rewarded with solid returns.

However, is Bank of America still a good buy at this slightly higher valuation, trading at almost 15 times earnings?

I think it still has some challenging times ahead. While interest rates are falling, it may take awhile before it can right size deposit rates and maximize its NII. However, lower rates should lead to more borrowing, so the increased loan activity will help.

The bank also faces the prospect of a slower growing economy, which could lead to weakening credit quality and higher provisions for credit losses. In addition, market growth is expected to be muted, which could impact wealth and investment management. However, a better market for investment banking should offset any potential losses elsewhere.

I certainly don’t think Bank of America is a bad investment right now. Its valuation is still decent, and the stock could see limited growth. But don’t expect the type of returns it has seen this year.