Apple remains in the top spot in Berkshire Hathaway’s portfolio commanding a 42% share, but Warren Buffett has bet 11% of his vast coffers on a single bank stock. To be precise, 11.45 % of his stock portfolio is allocated to Bank of America. What is it that the Oracle of Omaha sees in this bank that makes this bank so special?
We have uncovered a massive growth lever: loan revenues are set to mushroom higher. And heres’ why:
The overnight lending rate, the fed funds rate, controlled by the Federal Reserve has been on the march higher as Jay Powell and Fed governors have voted repeatedly to hike rates in a quest to stem the rising tide of inflation. Of course, banks benefit from a rising interest rate environment as their margins increase when they control deposit costs well.
And while all banks benefit from widening margins, Bank of America is especially well positioned to see loan revenue mushroom higher thanks to the fastest rising interest rate environment since the mortgage crisis a decade and a half ago.
$1 Trillion Reasons Why Buffett Loves BofA
With inflation running red hot, it might surprise most casual observers to learn that deposits at Bank of America are sky high. So high in fact that management has reported over $1 trillion in consumer deposits.
These deposits are an integral part of the equation that allows BofA to boost loan revenues. After all, the business model of banks is to loan a multiple of deposits. More specifically, bank revenues are largely a function of net interest income (NII), which is earned on loans, cash, and securities after covering their costs.
NII was up 7 percent in Q1 this year. In Q3, management forecast as much as an additional $1 billion. That projection assumes deposit growth is within normal bounds and loan growth is modest. If Bank of America’s CFO is right, he’ll be reporting a stellar quarter during the next earnings season because most of that billion will drop to the bottom line.
How good could things get for Bank of America?
Some analysts have forecast as much as a $15 billion NII for Q4. These projections are assuming a goldilocks scenario for Bank of America, which may be derailed as inflation numbers come in and depending on Federal Reserve policy.
Certainly, Bank of America’s Brian Moynihan has to address rising deposit costs but the bank’s significant increase in its deposit base means NII should mushroom higher.
40% Increase On The Cards?
What’s the takeaway? Bank of America is on pace to report net interest income of $60 billion for 2022. That would represent an increase of almost 40% on last year’s figure. It’s not a slam dunk but the economic winds of fortune are favoring BofA right now, and if the CFO reports a number close to this, expect shareholders to win big. By our estimates, Bank of America has at least 24.9% upside to $41.74 per share, but analysts’ consensus estimate is slightly higher at $42.23.