TipRanks Smart Value #49: Durable Returns
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Dear Investors,
Dear Investors,
Welcome to the 49th edition of our TipRanks Smart Value Newsletter!
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This Week’s Top Value Pick: Bank of America (BAC)
Bank of America (BAC) is a U.S.-based global financial institution providing a broad range of banking, investing, asset management, and financial risk management products and services. Its operations span consumer banking, global wealth and investment management, global banking, and global markets, serving individuals, small and middle-market businesses, and large corporations. Bank of America is one of the largest banks in the United States by assets and a leading provider of financial services worldwide.
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National Reach
Bank of America has evolved from a regional retail bank into one of the world’s largest and most diversified financial institutions, with its growth story tied to broader geographic reach, a wider product set, and expanding earnings capacity. The company traces its roots to 1904, when Amadeo Giannini founded the Bank of Italy in San Francisco to serve immigrants and small businesses underserved by traditional banks. This early focus on mass-market banking and deposits helped establish a stable funding base that would support long-term balance-sheet growth. In 1930, the institution was renamed Bank of America, reflecting its expanding ambitions beyond California.
For much of the twentieth century, Bank of America grew through a combination of organic expansion and regional acquisitions, building a dominant retail banking franchise on the West Coast and gradually extending across the United States. A transformational moment arrived in 1998 with the merger between Bank of America and NationsBank. The transaction created a coast-to-coast banking platform with significant scale in consumer and commercial banking, laying the foundation for higher operating leverage and a more diversified earnings stream.
During the 2000s, the company moved decisively beyond traditional deposit-taking and lending. The 2008 acquisition of Countrywide Financial added a leading mortgage origination and servicing platform, deepening exposure to the U.S. mortgage market and strengthening consumer lending capabilities. In the same year, Bank of America acquired Merrill Lynch, a landmark deal that established a major presence in global investment banking, capital markets, brokerage, and asset management. Although these acquisitions initially introduced credit losses and integration complexity during the financial crisis, they fundamentally reshaped the company into a diversified financial services enterprise with multiple profit engines.
In the decade following the crisis, management prioritized balance-sheet repair, cost efficiency, and risk discipline. The company exited non-core businesses including the full exit of its long-standing stake in China Construction Bank by 2013, resolved legacy legal issues, and invested heavily in compliance and internal controls. At the same time, Bank of America accelerated digital transformation across consumer and wealth platforms, driving higher customer engagement, lower servicing costs, and improved operating efficiency.
Today, Bank of America’s earnings reflect the outcome of a multi-decade expansion from a regional retail bank into a global financial institution with multiple profit engines.
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Banking Behemoth
Bank of America’s business model centers on operating a diversified, large-scale financial services platform that generates revenue from a broad mix of interest income, fee-based businesses, and capital markets activity. Rather than relying on any single product or customer segment, the company combines consumer banking, wealth and investment management, commercial and corporate banking, and global markets into an integrated ecosystem that produces recurring revenue, strong funding advantages, and operating leverage.
The foundation of the model is consumer banking, which encompasses deposit-taking, residential mortgages, credit cards, auto loans, and other personal lending products. A massive, predominantly retail deposit base provides Bank of America with a stable source of funding, supporting attractive net interest margins and resilience across interest-rate cycles. Consumer relationships are deepened through digital banking, payments, and lending products, increasing cross-sell opportunities and lifetime customer value while keeping servicing costs low.
Wealth and investment management represent a second core earnings engine. Through Merrill, which targets affluent and high-net-worth individuals, and its private bank, which serves ultra-high-net-worth clients, Bank of America offers brokerage, advisory, trust, and asset management services across the wealth spectrum. Revenue is driven by a combination of asset-based fees, transaction activity, and net interest income earned on client balances. The large installed base of client assets provides recurring fee revenue and natural operating leverage as markets and client balances grow.
Commercial and corporate banking provides lending, treasury management, cash management, leasing, and capital-raising services to middle-market companies, large corporations, and institutional clients. These relationships generate both interest income from loans and high-quality fee income from payments, trade finance, and advisory services. Importantly, many corporate banking clients also use the firm’s capital markets and risk management products, reinforcing cross-business integration.
Its Global Markets segment adds another layer of earnings power through fixed income, currencies, commodities, and equity trading, as well as underwriting and advisory. While more cyclical than other segments, this business benefits from Bank of America’s scale, global client base, and strong balance sheet, allowing it to capture share in active markets.
Several structural characteristics support continued earnings growth and cash generation. The company’s low-cost deposit franchise underpins stable funding and margin resilience. Scale across businesses creates operating leverage, enabling revenue growth to outpace expense growth over time. Ongoing digitalization reduces unit costs and improves customer engagement. Finally, diversification across consumer, wealth, corporate, and markets activities smooths results across economic cycles.
Together, these elements produce a business with multiple, complementary revenue engines, strong recurring cash generation, and durable long-term growth capacity.
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Structural Tailwinds
Bank of America is leaning heavily into AI and digital engagement to improve customer experience and lower operating costs. The bank’s virtual assistant, Erica, now handles billions of interactions per quarter, more than 200,000 employees use internal AI tools, and about 18,000 developers are supported by AI-assisted coding that has lifted productivity by roughly 30%. At the same time, peer-to-peer payments through Zelle continue to grow at a double-digit rate, reinforcing the bank’s role in everyday consumer transactions. Higher digital usage improves customer retention and supports cross-selling while reducing reliance on branches and call centers, which lowers operating costs.
Technology and AI spending is expected to rise in the mid-single digits in 2026, with total technology investment around $13 billion, including several billion dollars directed to new initiatives. Management views this spending as directly tied to productivity gains and long-term cost efficiency rather than as structural cost pressure.
At the same time, management is keeping total headcount around 213,000 even as the business expands. Productivity gains from automation and AI allow the bank to support more customers and transactions without adding staff. This is the primary reason that management expects about 200 basis points of operating leverage in 2026, meaning revenues should grow faster than expenses. This translates directly into improving margins and faster earnings growth over time.
The bank is working to lower its funding costs by changing where it gets its money from. Today, part of the bank’s funding comes from wholesale sources such as institutional borrowings and short-term market instruments. These sources tend to be more expensive and can fluctuate with market conditions. Management plans to reduce this type of funding by roughly $50 billion to $100 billion over time and rely more on its nearly $2 trillion base of customer deposits, which are typically cheaper and more stable.
In simple terms, this is akin to replacing higher-interest “debt” with lower-interest “debt.” As a result, the bank pays less in interest expense, which directly improves net interest margin and net interest income, even if overall loan growth is only moderate. This means higher profitability without taking on more risk or needing a strong surge in lending.
In addition, the bank’s asset base naturally resets to higher rates over time. Each quarter, about $12 billion to $15 billion of older loans and mortgage-backed securities mature or are paid down. These assets originated when interest rates were much lower. When the bank reinvests that money into new loans and securities today, it can earn yields that are roughly 1.5 to 2 percentage points higher than before.
This creates a built-in tailwind for interest income: a portion of the balance sheet automatically becomes more profitable each quarter, even if interest rates do not rise further. This provides visibility and confidence that net interest income can continue to grow through repricing and funding optimization alone.
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Sustained Strength
Over the past five years, Bank of America has delivered steady revenue growth and faster earnings expansion, with revenue rising at a CAGR of 7.7% CAGR and earnings per share growing at a 15.3% CAGR. Growth has been driven by expanding net interest income from loan and deposit growth and asset repricing, alongside rising contributions from fee-based businesses, including sales and trading, wealth management, and investment banking. Disciplined expense control, productivity gains from technology investments, stable credit performance, and share repurchases have further strengthened operating leverage, margins, and EPS growth.
That momentum carried into fiscal 2025. Bank of America reported revenue of $113 billion, up 7% year-over-year, while net income rose 13% to $30.5 billion. Growth was broad-based, spanning net interest income, sales and trading, asset management fees, and investment banking activity. Earnings per share increased 19% year-over-year to $3.81. Profitability strengthened meaningfully, with return on tangible common equity (ROTCE), a measure of profit generated on common shareholders’ tangible capital, rising 128 basis points to 14.2% and return on assets (ROA), which reflects earnings generated per dollar of assets improved to 0.89% from 0.82% in FY24, reflecting more efficient use of the balance sheet.
The company generated positive operating leverage throughout the year, with revenue growth exceeding expense growth by roughly 250 basis points for the full year and 330 basis points in the fourth quarter. The efficiency ratio improved to 62% from 63% in FY24, indicating that a smaller share of each revenue dollar was consumed by operating costs. Net interest income increased 7% year over year in 2025, supported by higher loan and deposit balances and continued repricing of fixed-rate assets.
The fourth quarter capped the year with continued strength. Net income increased 12% year over year to $7.6 billion, earnings per share rose 18% to $0.98, and revenue grew 7% to $28.4 billion, exceeding expectations. Results were supported by higher net interest income and solid fee growth. Noninterest expenses rose 4% to $17.4 billion, primarily reflecting revenue-linked incentive compensation and ongoing technology investments. During the quarter, net interest income increased 10% year over year to $15.8 billion, net interest yield expanded to 2.08%, and tangible book value per share1 rose 9% year over year to $28.73.
Fee-based businesses also contributed meaningfully. In Global Markets, sales and trading revenue increased 10% year over year to a record $21 billion in 2025. The fourth quarter marked the fifteenth consecutive quarter of growth, with sales and trading revenue of $4.5 billion, driven by particularly strong equities trading. Asset management fees rose 12%, while investment banking fees increased 7%, reaching their highest level since 2020 outside of pandemic-driven peaks. Global Wealth and Investment Management reported client balances of $4.8 trillion in the fourth quarter, up 12% year over year, and assets under management of $2.2 trillion, an increase of 16%, supporting a steadily expanding, market-linked fee base.
Balance-sheet trends remained constructive. Average loans grew 8% year over year to $1.17 trillion, outpacing industry growth, while deposits increased 3% to approximately $2 trillion, marking the tenth consecutive quarter of deposit growth. Consumer Banking added roughly 680,000 net new checking accounts during the year, bringing total consumer checking accounts to about 38.4 million. This sustained customer growth supports both interest income and cross-selling opportunities. Total assets remained stable at approximately $3.4 trillion.
Credit quality remains solid. The net charge-off ratio stands near 0.44%, delinquencies are stable, and card charge-offs have improved to about 3.4%. Management’s through-cycle assumption for charge-offs is 50 to 55 basis points, suggesting no near-term need for materially higher provisioning. The allowance for loan and lease losses stood at 1.12% of total loans. Capital and liquidity positions remain strong, with a CET1 ratio2 of 11.4% and $975 billion of global liquidity sources.
Looking ahead, management continues to emphasize growing revenues faster than expenses as the primary driver of operating leverage. For 2026, Bank of America expects mid-single-digit loan and deposit growth and net interest income growth of 5% to 7%, supporting a constructive outlook for continued earnings expansion. This outlook is underpinned by steady net interest income growth and a healthy fee environment, with ongoing strength in asset management, investment banking, and trading. Management also noted that if revenues were to come in below expectations, related expenses would likely adjust downward, helping protect profitability.
For the first quarter, management highlighted typical seasonal dynamics. Trading activity is generally stronger early in the year, while payroll tax expenses are higher, and results will not benefit from a one-time FDIC-related item that supported the fourth quarter. Taken together, first-quarter expenses are expected to be approximately 4% higher than a year earlier.
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1- Tangible book value per share is common equity excluding goodwill and other intangibles divided by shares outstanding.
2- The CET1 ratio measures a bank’s core equity capital, primarily common stock and retained earnings, relative to its risk-weighted assets and indicates its ability to absorb losses while meeting regulatory capital requirements.
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Quality Returns
Over the past year, Bank of America’s stock has risen by roughly 19%, driven by tangible improvements in operating performance rather than a purely sentiment-led rally. Earnings consistently exceeded expectations, supported by higher net interest income in a still-elevated rate environment, a recovery in fee and trading revenues, and resilient loan and deposit growth across core consumer and commercial franchises. Improved cost discipline and efficiency initiatives further strengthened profitability, while investor preference for large, well-capitalized banks provided an additional tailwind.
This improvement in fundamentals is reflected in valuation metrics. Based on non-GAAP trailing and forward price-to-earnings ratios and the forward price-to-book multiple, Bank of America now trades at more than a 7% premium to its historical averages, indicating higher market confidence in earnings durability and balance-sheet strength.
However, this premium looks more modest when viewed through a peer comparison lens. Relative to major U.S. banks such as Citigroup, Wells Fargo, and JPMorgan, Bank of America continues to trade toward the lower end of the valuation range on both trailing and forward non-GAAP P/E ratios. Its forward PEG ratio of 1.0, which adjusts valuation for expected growth, places BAC in the middle of the valuation spectrum. It indicates that the market expects steady, achievable earnings growth and is pricing that growth in a balanced way, especially compared with peers that trade at PEG ratios above 1, where more optimism is already embedded, or below 1, where growth expectations may be more conservative or risk adjusted. This reinforces the view of BAC as a quality value or GARP-style investment, one where returns are more likely to come from consistent earnings delivery, capital returns, and incremental re-rating, rather than from a deep valuation discount alone. This indicates that, despite the recent share price appreciation, Bank of America is still not being priced as aggressively as some competitors when growth expectations are considered.
Analysts remain bullish on the outlook, citing Bank of America’s diversified franchise across consumer, corporate, markets, and wealth management, which provides stable, recurring revenue streams and meaningful scale advantages. These factors support cost efficiency, cross-selling, and earnings resilience across economic cycles. Consistent loan growth across key segments, together with explicit net interest income guidance, reinforces confidence in sustainable core earnings and margin trajectory.
Street consensus implies a roughly 9% upside from current share levels, with more bullish forecasts pointing to potential gains of up to 26%. The dispersion in price targets reflects differing assumptions around the pace of interest-rate cuts, net interest income durability, credit normalization, and the scope for further valuation re-rating. This optimism is reinforced by discounted cash flow analysis, which suggests Bank of America’s shares may be trading at an estimated 30% discount to intrinsic value, providing valuation support for long-term investors.
Bank of America has maintained a consistent dividend record since 2005 and has raised its dividend for 12 consecutive years, highlighting a long-standing commitment to shareholder returns. Over the past decade, the dividend has grown at an annual rate of about 17.5%, supported by a payout ratio of roughly 28% of adjusted earnings, which provides ample flexibility for reinvestment and balance-sheet strength. At current levels, the bank’s dividend yield of approximately 1.9% exceeds the financial sector average of around 1.3%. Most recently, Bank of America declared a quarterly dividend of $0.28 per share, with an ex-dividend date of March 6 and a payment date of March 27.
Beyond dividends, capital returns remain heavily weighted toward share repurchases. In the fourth quarter, Bank of America returned $8.4 billion to shareholders, including $2.1 billion through dividends and $6.3 billion via share buybacks. The roughly $1 billion sequential increase in repurchases from the third quarter reflects stronger earnings momentum over the past six months and a modest reduction in excess capital, while also signaling management’s confidence in the sustainability of cash generation and its view that the shares remain attractively valued.
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Investing Takeaway
Bank of America offers a compelling value proposition rooted in scale, diversification, and steadily improving fundamentals. The bank’s expansive deposit franchise, multiple earnings engines, and disciplined cost structure provide durable cash generation across economic cycles. Ongoing investments in digital capabilities and automation are strengthening operating leverage, while balance-sheet optimization supports margin resilience even in a moderating growth environment. Importantly, valuation remains reasonable relative to peers when adjusted for earnings quality, growth visibility, and capital return capacity. Share repurchases and a well-supported dividend reinforce management’s confidence in intrinsic value and long-term profitability. For investors seeking a high-quality financial institution with consistent earnings delivery, strong capital discipline, and the potential for incremental re-rating, Bank of America stands out as a value-oriented opportunity grounded in sound fundamentals.
