Here’s why Bank of America is my biggest investment in banking stocks

AAs the Federal Reserve prepares to start raising interest rates in 2022, the financial sector could be a big beneficiary. However, in this crazy live Video clip, recorded on January contributor Matt Frankel explains to colleague Jason Hall why he thinks Bank of America (NYSE: BAC) could be a big winner.

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Matt Frankel: We’ve heard most of the big banks, they usually kick off earnings season, so first I want to talk about my biggest personal banking investment, which is Bank of America, the ticker symbol is BAC. Just to summarize the numbers, Bank of America beat earnings expectations due to a large release of reserves. Remember, all these banks set aside billions of dollars because they thought COVID was going to cause people to default on their loans, things like that.

That didn’t really happen, so they released a lot of those reserves. But they missed the revenue expectations, which is why the stock didn’t really respond positively to that. But the shortfall is really the only bad thing I can say about the bank.

Earnings and revenue increased significantly year over year, despite the fact that we are still in a low interest rate environment. Wealth management revenue hit an all-time high, which accounts for a large portion of Bank of America’s business. Investment banking fees were up 26% year-over-year, which is pretty good considering that last year investment banking went crazy.

Jason Hall: Last year was a banana year.

Frankel: To the right. This comes on top of an already strong 2020 for the investment bank. One type of key point on the Bank of America report as we run through these others, spending is a big concern among banks. Wage pressures are up, benefits are up, things like that. Bank of America expects its non-interest expense to not rise in 2022 unlike many of its peers. The reason is that Bank of America has really been at the forefront of these wage increases. I think their minimum wage, don’t quote me on that, is about $25 an hour right now or they just announced they’re raising it to $25. They’ve really been ahead of the curve with that. I have the impression that this wage pressure does not hit Bank of America as much as the others.

Room: I think they also benefited from the fact that they continue to look at the retail organization, so fewer banks open, fewer people to pay. You can raise the hourly wage, and it doesn’t affect your expenses as much.

Frankel: I don’t know your market, but my local market, Bank of America, is the only major bank I know that has killed the drive-thru. You can no longer go to a Bank of America drive-in. You can do this at Wells Fargo.

Room: To the right.

Frankel: They have replaced their drive-thru with ATMs. But if you’re paying your employees $25 an hour and you need to find a way to make your business more efficient to do that, I’m all for it. Here’s a crazy stat I’ve seen. Bank of America bought back more than $25 billion of its stock in 2021. Twenty-five billion, I bet the biggest shareholder, Warren Buffett, is really happy about that. Aren’t you excited, Jason?

Room: I’m going to share here just a quick slide from the presentation that highlights this because they showed this 99% net payout rate when I first saw this and I’m like, start setting off some alarms , but then you follow the note here and it was a combination of dividends, which usually when we see a payout ratio we think of dividends, but also buybacks.

This is a company that has really prioritized return, basically all of its income to investors. I think that’s wonderful, especially Matt, you and I both think the action is pretty valued right now. It’s not buying at the top. It might be like that in the short term just because the markets sometimes get weird, but I think they’re buying back the stocks at a reasonable price, which is really important for capital allocation and returns for investors.

Frankel: Of course, I wouldn’t call it a gaudy bargain like it was a few years ago.

Room: No.

Frankel: But for good reason and I’m glad Jason brought up their presentation. I would add a few to scroll through a slide. It’s here. This is the next slide of this presentation. This compares Bank of America to pre-pandemic levels. Look at this, net new checking accounts are up 64% since 2019. Average checking account balance is up 37% since 2019. If you look at all these numbers here, investment banking market share has gone up . Assets under management, net inflows, $73 billion. Digital sales are up 45%.

Room: Matt, how does Bank of America compete with fintech? Fine.

Frankel: How are you.

Room: All right, okay.

Frankel: Bank of America, I thought that was a trick question for a second. Bank of America is consistently ranked #1 mobile app, #1 online banking platform. They were one of the companies that created Zelle to compete with Venmo and Cash App do a good job. I think the last time I saw Zelle’s payout volume was on par with these two. They are doing very well in the fintech competition.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jason Hall owns Bank of America. Matthew Frankel, CFP® owns Bank of America. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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