Bank of America | Fundamental Analysis

Under Brian Moynihan's leadership, there has been a simply astounding transformation of Bank of America's business after the deep financial crisis. The bank has transformed from one institution whose viability was in question to a better institution with exceptional asset quality, a priority on effectiveness, and industry-leading technology. And investors who bought stock in turbulent times have been well rewarded. Throughout the past decade, Bank of America has delivered an unbelievable 820% total return, and investors who bought it during the worst moments of the financial crisis have done even better.

Nevertheless, many analysts still call Bank of America stock "cheap," and with a reasonable explanation. Given several catalysts that could lead to earnings growth in 2022 and beyond, could Bank of America, which currently trades at about $48, reach $100 within this year?

Some pretty compelling catalysts could push Bank of America's earnings up in 2022. Interest rates and inflation are possibly the most critical for investors to understand.

Let's start with interest rates. The U.S. Federal Reserve looks set to begin raising interest rates in 2022 to curb inflation, and investors expect at least three 25-basis-point rate hikes, as per the futures market, with a high probability of four or more. That would raise interest rates on loans for banks in general, and Bank of America, with its high share of non-interest-bearing deposits, would benefit the most. The bank estimates that raising the yield curve by 100 basis points would result in an additional net interest income of $7.2 billion a year.

Then there's inflation. Higher inflation not only usually leads to higher interest rates, but also means higher consumer prices. Not only does this mean that consumers are paying higher interest rates, but the average amount they need to borrow to finance the purchase of a new car, house, or other purchase will also increase.

One proviso is that rising interest rates can lead to lower consumer spending and other economic activity, and if rates jump too high, it's definitely worth keeping an eye on. But since interest rates are near record lows, there will be plenty of room for them to rise before it has a significant impact on spending.

Over the past couple of years, bank investors have been worried about the possible consequences of the COVID-19 pandemic on businesses, such as loan defaults and foreclosures. And fortunately, the banking industry seems to have managed to avoid any negative scenarios.

On the other hand, it's easy to miss some of the positive statistics and strong results achieved over the past two years. For instance, the average current account balance at Bank of America is now 40% higher than it was in Q3 of 2019. Digital sales (e.g., customers getting credit online) are 33% higher than before the pandemic. And Bank of America has raised its investment banking market share by 60 basis points to 6.9% over pre-pandemic times.

In short, Bank of America enters 2022 in excellent shape for its business and is in an even better position than before to benefit from a strong economy.

Bank of America stock will likely be worth $100 in the not-too-distant future, but within the next year, it is unlikely. The Fed is not forecasted to raise interest rates much in 2022, and while consumer interest rates are likely to be higher a year from now, there is little reason to believe that they will jump enough to double the bank's profitability.

Whether or not Bank of America reaches a triple-digit stock price this year, the fact remains that in 2022 and beyond, there could be some pretty strong related factors contributing to earnings growth, and Bank of America could indeed be a bargain at current levels.