As investors look towards 2023, there is renewed hope for a more positive market and economic environment. However, the reality is that the conditions that led to the 2022 bear market have not really changed much and may be with us for a while.
But some stocks, like Bank of America Corp. (BAC -0.86%), actually ended the year on a high note, relatively speaking. Bank of America gained 6.39% in the second half of 2022, according to S&P Global Market Intelligence. Can he continue that momentum in 2023? Is the worst over?
Better than the average bank
Bank of America, the second largest bank in the US, actually outperformed the average bank stock in the second half of 2022. The KBW Nasdaq Bank Index, which tracks the performance of the largest banks, was essentially flat in the second half of year. For the full year of 2022, the index was down 21.4%, while Bank of America fell slightly more, 23.8% in the 2022 calendar year.
So what drove the outperformance in the second half of the year? Rising interest rates allowed the bank to generate high levels of net interest income on its loans, offsetting losses in other parts of its business, particularly investment banking and asset management. In the most recent quarter, the third quarter, interest income was $13.8 billion in revenue, up 24% year over year. That accounted for more than half of the $24.5 billion in total revenue.
Two other factors contributed significantly to Bank of America’s outstanding performance in the second half of last year. Lending activity, however, remained strong, as average loan balances increased 11% year-over-year to $1.0 trillion in Q3. The second key metric is credit quality. Bank of America was able to lower its net charge ratio in Q3 from the previous quarter and keep it on par with Q3 2021. This, in turn, kept the provision for credit loss increases down, relative to others.
Bank of America has benefited from a decade-plus commitment to diversifying its loan mix. In 2009, 67% of its loans were consumer loans. In 2022, 56% of loans will be commercial loans, and 44% consumer loans. This helped lower the bank’s credit risk.
What’s in store for 2023?
With interest rates expected to continue to rise and the possibility of an economic recession, 2023 could be another challenging year. But Bank of America is well positioned to continue its positive momentum given high interest rates, expected loan growth, and good credit quality.
One other advantage Bank of America had was low deposit betas – the amount it has to increase the interest paid on deposits as interest rates fall. At the end of Q3, Bank of America had a lower cost of deposit and raised its deposit rate the least of any major bank except Wells Fargo.
This means that the less is paid out in deposit interest, the more the bank can maximize net interest income. Bank of America is able to do this because it has successfully grown deposits with a stable and growing customer base and a wide array of products and services.
All in all, the worst should be over for Bank of America. There is still uncertainty this year, but ultimately, the stock should have a better year in 2023.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool posts and recommends Bank of America. The Motley Fool has a disclosure policy.
