Is There another Oil Scare for Bank of America Corp (NYSE:BAC)?
Low oil prices have not only destabilized global economies but are also posing a tests to banks across the globe. Prices trading at all-time lows has plunged many energy companies into insolvency making it hard for most of them to pay back bank loans. Bank of America Corp (NYSE:BAC) as it stands has the biggest dollar value of loans extended to the energy sector. It is a position that evokes doubts about the bank’s prospects especially on prices declining from the current levels.
Oil Prices have bounced back from their 13-year lows of $26 a dollar to the current highs of about $40 a barrel. It is a momentum that that has helped push Bank of America Corp (NYSE:BAC) shares up in the market. The stock is already up by 23% since the start of February. Given the impressive run, Author Markos Kaminis of Seeking Alpha believes the stock is making a case for itself as a long-term investment.
Short Term Risks
In the short term, Bank of America possesses one of the biggest risks in the banking sector. Given the uncertainty that continues to grip the energy sector provision of credit losses could rise should prices not stabilize at the $40 a barrel mark. JPMorgan Chase & Co. (NYSE:JPM) possess the lowest risk at the current oil prices given its limited exposure to the energy sector.
The worst pain for banks lies ahead as OPEC meeting next month could set the tone on the bank’s prospects going forward. Of great concern is whether the major producers will reach an agreement on further output freeze, to help sustain the current momentum. Oil prices have rallied in recent weeks on the belief that an oversupply that has engulfed the market is slowly coming to an end.
Major oil producers balancing forces of supply and demand should help steer prices higher. Prices need to trade above the $40 a barrel mark for most companies to be able to make significant returns on their investment. In exchange, they should be able to pay back their loans from the likes of Bank of America Corp (NYSE:BAC).
Europe economic expectation is another point of concern that continues to send shockwaves in the banking sector. The economic block has in the recent past shown signs of recovery amidst policy efforts spearheaded by the central bank. However, recent terrorist attacks in Brussels have all but continued to put more pressure on the fragile economy.
Businesses and governments are now being forced to spend a great deal on security rather than opportunities for growth. Tourism and consumer spending habits is on a decline putting further pressure on the economy. Kaminis expects a downward revision of European economy to have an impact on the energy sector.
A revision of economic expectations should weigh in on energy demand calculations as the market will have to adjust for the same. The imbalance on energy supply and demand should be the most affected as a result which should push prices even lower. Such a scenario would go a long way in making it hard for energy companies to service their loans.
Kaminis views the near term pressures as temporary, presenting an opportunity for long-term investors to buy the stock. Bank of America Corp (NYSE:BAC) remains extremely cheap at the current trading levels. Its deep discount to tangible book value makes it an exciting pick compared to its rivals according to the analyst. The exposure to oil while large, is only a speed bump at best and nothing like the mortgage crisis.
The Federal Reserve tone towards two possible rate hikes in the year also continues to make a case for the stock as a long-term investment. The American economy has so far remained resilient amidst the happenings on the global scene. A further increase in interest rates should be good news as the same should go a long way in bolstering profit margins in the banking sector.
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