Bank Of America: P/E Ratio Comparison To JPMorgan Chase And Wells Fargo (NYSE:BAC) (2024)

In this continuing series, we've been analyzing bank stocks, yields, and the macro conditions that drive financials. With two Fed hikes behind us this year, it's a good time to reevaluate how current monetary and economic conditions are impacting Bank of America Corporation (NYSE:BAC), as compared to two of its peers, JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC).

Oddly enough, bank stocks are down since the March Fed hike. And since typically higher yields bolster bank stocks, it appears financials are telling us something isn't quite right in the markets, and this "X" factor needs to be addressed for banks to resume their rally.

BAC data by YCharts

Bank stock price performance since Q1 earnings reports:

• In the chart below, we see that following a strong earnings season for banks, our three banks are up only modestly (since mid-April) when they reported Q1 earnings.
• Also, since the last earnings report, the Fed has hiked twice, and typically higher rates lead to a rise in banks stocks. However, we see little reaction in stock prices from financials.

BAC data by YCharts

• To get a sense of how rare three hikes in seven months are for the Fed, we have to go back to 2004 to see the last time the Fed was in a hiking cycle. The current cycle began in December 2015.

Growth could be the X factor for the next move higher:

• From the chart below, we can see GDP growth was higher in 2004 compared to the current monetary tightening policy. The U.S. has posted only one-quarter over 3% growth since 2014.

• Going back even further, we can see GDP growth was much higher during past Fed hiking cycles.
• If you think today's market can't be compared to the early-to-late nineties, you're probably correct. During the early nineties, Facebook didn't exist since Zuckerberg was still a teenager, Netflix and Google had only just formed in '97-'98, and when Steve Jobs took over as CEO in '97, Apple was 90 days from declaring bankruptcy.
• However, the fact that we must look back as far as the 1990's to find multiple examples of monetary tightening, only underscores the notion that a change in monetary policy rarely occurs and the policy change typically lasts for years.

Should we be concerned bank stocks are not moving higher?

• It appears the market could be looking for better growth numbers to justify the current valuations in bank stocks. Despite the massive quantitative easing going on in Japan and Europe and a $4.5T balance sheet of the Fed, stellar earnings, and a business-friendly Washington, bank stocks have paused and perhaps are waiting for solid proof that the economic fundamentals have shifted in favor of the banking industry.
• Perhaps bank stocks are telling us it's going to take stronger fundamental developments to move the needle in the coming months than had been the case in the past.

P/E ratio analysis:

• P/E ratios have come down substantially since the Fed hike in March with Bank of America's P/E down over 20% in a few months.

BAC PE Ratio (TTM) data by YCharts

YTD P/E ratio percentage change:

• It's surprising (at least it was to me) that Wells Fargo's P/E is down only 2.65% given the new account scandal the bank has endured.
• For those looking to get into Bank of America or JPMorgan, the drop in P/E ratios on a percentage basis, (see chart below) are a positive sign that valuations are coming back in line with their peer banks.

BAC PE Ratio (TTM) data by YCharts

• In looking forward, we see that price versus expected future earnings or forward P/E for Bank of America has also come back down with Wells and JPM.
• If GDP growth performs better than expected in the coming quarters, pushing yields higher, all three banks may be poised to rise. Given the recent adjustment in P/Es, the current ratios may turn out to be some of the lowest levels by the time this year winds down.

BAC PE Ratio (Forward) data by YCharts

Going forward:

• The P/Es and Forward P/E ratios outlined here make a good case that BofA is now valued in line with its peers; at least strictly from a P/E ratio standpoint. Of course, this article is by no means, an exhaustive analysis and many factors go into valuing a bank than simply P/E ratios.
• On a risk management note: Beware of BofA's current P/E premium as compared to its peer banks. As a result, a weaker than forecast earnings report or sustained lower Treasury yields might pressure the stock to the low 20's as traders sell into rallies if they feel BofA is overvalued.
• The quarter-to-quarter differences in earnings performance results are becoming less dramatic since we're no longer comparing the current quarter or year to a disastrous prior quarter or prior year.
• As a result, we'll have to probe deeper inside the numbers of loan growth, net interest income, and non-interest income to look for positive signs that it's time to enter a long position.
• From a macro standpoint, it's likely we'll need to see sustained economic growth and subsequently rising Treasury yields (signaling optimism) to resume a sustained bank rally.

Bank of America is in a great position to rise in the long-term if yields and growth perform well in the coming months. Bank of America's business loan portfolio tends to favor variable rate loans called commercial and industrial loans or C&I loans. The profitability of C&I loans rises with rising yields, and BofA will likely move in lock-step.

Until we see both yields and growth rise together, we're likely to endure a wait-and-see market. However, once the fundamentals come together and move higher, I think we'll find that it was well worth the wait.

Good luck.

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Chris B Murphy