We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where Bank Of America Corporation (NYSE:BAC) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A professional banker providing consultation to a customer in the security of his office.
Bank Of America Corporation (NYSE:BAC)
Analysts’ Upside Potential: 9.22%
In terms of total assets, Bank of America is the second-biggest commercial bank in the US. Boasting a significant retail banking presence throughout all major U.S. regions, Bank of America Corp (NYSE:BAC) provides services to about 69 million individual and small business customers.
BAC has created a strong brand presence and ease of use for its customers with about 3,800 retail financial locations, 15,000 ATMs, and top digital banking systems. The digital platforms of the bank boast an approximate user base of 46 million, comprising 38 million active mobile users. This suggests that the bank has effectively shifted to digital banking and is capable of meeting the changing demands of its clientele.
Global Wealth & Investment Management (GWIM), Global Banking, Global Markets, and Consumer Banking are BAC’s four primary business segments. By diversifying its business, BAC is able to provide a broad range of banking and nonbank financial services and products while reducing the risk of market and industry-specific downturns.
Bank of America has put in place initiatives that help both customers and staff. The most sophisticated and first publicly accessible virtual financial assistant, Erica, was introduced in 2024 and as of 2024, more than two billion clients had engaged with them. Erica’s skills assist corporate and individual clients throughout the company, including CashPro, Benefits, and Merrill.
BAC raised its minimum hourly wage to $23 in September 2023, with intentions to raise it to $25 by 2025.
Strong performance in the investment banking segment and solid net interest income helped Bank of America Corporation (NYSE:BAC) submit an earnings report card for the second fiscal quarter that was better than anticipated. The price of the shares increased by over 5% as a result of the earnings report, reaching a high not seen since the start of FY 2022.
In general, Bank of America’s robust revenue from trading and investment banking, along with a favorable projection for net interest income, points to the company’s durability and growth potential even in an environment where the fed is trying to curtail inflation. However, increased deposit costs and growing provisions for credit losses are eating into profitability.
ClearBridge Value Equity Strategy stated the following regarding Bank of America Corporation (NYSE:BAC) in its first quarter 2024 investor letter:
“We added several new positions during the quarter. Our largest new addition was Bank of America Corporation (NYSE:BAC), one of the world’s leading financial institutions, serving some 66 million consumer and small business clients across the U.S. as well as large corporations, financial institutions and governments globally. We believe that the interest rate pressure that Bank of America faced in early 2023 has subsided, and risks surrounding deposit outflows have abated, which should allow the company to improve its book value and capital growth as well as benefit from a rebound of capital markets activity.”
BAC is one of the Best Financial Services Stocks To Buy Now since it has promising growth potential, as seen by 19 analysts, BAC has a consensus Buy rating with an average price target of $42.39 and an upside potential of 9.22% from the current stock price of $38.81.
Overall BAC ranks 7th on our list of the best financial services stocks to buy. While we acknowledge the potential of BAC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than BAC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
