Bank of America shares could struggle as a key financial indicator for banks shows tightening, according to Atlantic Equities. Analyst John Heagerty downgraded the stock to neutral from overweight. He also lowered his price target by $5 to $40. The new target implies a 13.3% upside from where the stock closed Monday. Though Bank of America management has kept a handle on expense growth, Heagerty said it will be difficult to have operating leverage as net interest income, which finds the difference between revenue from interest-bearing liabilities and the cost to the bank of servicing them, slows. “With slowing NII growth and non-II revenues also facing headwinds in 2023, we are downgrading BAC to Neutral,” Heagerty said in a Tuesday note to clients. Heagerty said investors have started focusing on potential net interest margin declines in 2024 and the headwinds they would create for revenue. He added that the upside to net interest income for the current year is already priced into the stock. He expects pre-provision profit growth slowing from 14% in 2023 to 3% in 2024. Major banks delivered mixed results for the fourth quarter, as Heagerty noted financial stocks tend to struggle leading up to a recession but can outperform once the extent of an economic slowdown is clearer. Industry wide, he called net interest income forecasts for 2023 “slightly disappointing.” He said banks will continue to see “charge-offs,” or when outstanding debt cannot be collected. This contributes to pressure on performance, he said. Besides Bank of America, Heagerty reiterated his other bank stock ratings. He’s overweight on Wells Fargo and First Republic but underweight on Goldman Sachs . Bank of America traded down 0.9% in the premarket. The stock is up 6.6% in 2023 after losing 25.6% in 2022. — CNBC’s Michael Bloom contributed to this report.
