BAC Stock In Position As the Best In The Sector

By Reina Ilagan

Nov 30, 2016 05:27 AM EST

The Bank of America's stock, being the most heavily traded stock on the S&P 500, may have high volatility but also holds potential for long-term hold as it is positioned to benefit from new regulations and a rise in rates.

In the mid-2016, shares in the Bank of America Corp were on a 30% loss year-to-date, but now it has come back on course as its stock is up 20% for the year. It has shown progress in trading, loans and cost cuts.

BAC's price-to-book ratio has been climbing for more than three months as it rose from 0.55 midsummer to 0.68. There is an improvement in BAC stock's relative performance since June.

Analysts at Keefe, Bruyette & Woods expect the broader banking sector to gain benefits from higher interest rates and lighter regulations.

KBW noted on the bank sector's return on tangible common equity or ROTCE next year.

"In our breakdown of bank profitability today compared to the period of peak profitability in the early 2000s, we roughly estimate that industry ROTCEs could move up 200 basis points from the current level of 12.3% under a possible scenario of higher interest rates and reduced regulation, assuming no change in tax rates. This suggests that a further 16% upside to the [KBW Nasdaq Bank Index] is possible based on today's overall market values."

KBW also noted that the "ability of banks to demonstrate higher profitability will take time and the avoidance of major credit issues."

Based on this report, if the corporate tax rate were to drop by 10%, it would bring a 2% boost on profitability.

Given Bank of America Corp's exposure to an interest-rate hike, its stocks should outperform. And its shares being heavily traded, investors would not need to worry about buying into it and selling their stock later.

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