Bank of America Corp (NYSE:BAC) stock may have outperformed the market on Wednesday, but it has been a different story over the last 10 years. BAC stock, and banks stocks in general, represent one of the few big industries that are not trading near or at all-time highs. With Trump in charge, all that could change very soon. In fact, Bank of America stock could very well double or more under his lead.
Before discussing why, I made a case back in September that BAC stock could double over the next two or three years. Keep in mind, Trump was an afterthought to win the election. Thus, my prediction was based on the current administration’s policy.
There were three reasons why:
First, valuation. Bank of America stock would have to trade higher by 50% to match its book value per share (in September).
Second, improved fundamentals and earnings performance. Notably, it has been Bank of America’s woeful performance that has kept BAC stock trading at such a deep discount to its competitors.
Third, and finally, interest rates are going to rise. The Fed’s balance sheet prevents it from keeping interest rates low forever. Soon, the Fed must accelerate interest rate growth.
BNL Finance agrees with Goldman Sachs that a 3% interest rate would cause a 50% rise in BofA’s normalized earnings. A 3% interest rate seems far off in the distance, but under Trump, it might not be that far away.
Therefore, if BofA can continue to improve its business, which includes paying larger dividends and bigger stock buybacks, we believe its stock multiples will rise. And if the Fed will raise interest rates, then BAC stock could double quickly as earnings grow and BofA’s valuation exceeds its book value.
How Donald Trump speeds the process for BAC stock
Donald Trump is seemingly against everything that has kept bank stocks from outperforming the market. Trump has publicly called out the Federal Reserve’s role in keeping interest rates low for too long. Furthermore, Donald Trump has expressed a desire to get rid of most if not all the policies that were put in place after the financial collapse in 2009.
We are talking about everything from Dodd Frank to ending the annual stress tests that limit a bank’s capital return plans. Bank of America should be able to pay a 4% dividend and purchase 5-7% of its shares outstanding each year with the kind of earnings it creates. Unfortunately, stress tests and tough regulations prevent such activities and place very low ceilings over the banks, especially consumer banks like BofA.
If Donald Trump concludes that more oversight is bad policy then the sky is the limit for BAC stock. At that point, all the catalysts I previously mentioned as reasons that Bank of America stock could double are amplified.
Bank of America stock will double
Of course, there is the obvious reality that banks were largely responsible for the worst financial crisis since the Great Depression, and that eliminating tough policy could lead to a repeat of bad history. However, Trump is not saying “do away with all oversight”, but rather get rid of the oversight that prevents banks from lending, making money, and being an asset in growing our economy.