Bank of America (BAC) posted financial results for the second quarter last month, exceeding analyst expectations, delivering solid earnings and growing its loan portfolio, helping to drive the stock up roughly 7.5% in the past three months. Yet, underneath these numbers lies a major risk that could significantly impact future performance. The bank’s heavy dependence on net interest income (NII) in an environment where interest rates may soon decline has it walking a tightrope.
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While the bank has thrived in the current interest rate environment, questions remain about how well it can navigate the choppy waters of changing monetary policy. Further, the bank has come under fire from President Donald Trump, suggesting the potential for retribution in the form of an executive order.
With the shares up over 21% in the past year, and trading at valuation levels in line with its peers, I am Neutral on the stock, and prefer to stay on the sidelines while interest rate (and political) uncertainty remains.
The Impact of Net Interest Income
Bank of America’s recent financial performance has been largely driven by NII, which is the difference between what the bank earns on loans and what it pays on deposits. In Q2, the bank generated $14.7 billion in net interest income, helping to drive a 6% year-over-year increase in retail banking revenue.
Management projects net interest income will reach $15.5 to $15.7 billion in the fourth quarter of 2025, suggesting continued momentum. For the full year, executives anticipate NII growth of 6-7%.
Several factors have contributed to this impressive performance. The bank has successfully expanded both its deposit base and loan book while benefiting from fixed-rate asset repricing that occurred during the previous interest rate cycle. Additionally, commercial borrowers have increased their utilization rates, providing the bank with more lending opportunities with attractive margins.
When compared to its major competitors, Bank of America’s NII performance looks strong, with Citigroup (C) anticipating a 4% year-over-year increase in net interest income for 2025, and JPMorgan (JPM) projecting 3% year-over-year growth.
Rate Sensitivity and the Net Interest Yield Dilemma
As demonstrated by NII, Bank of America is among the most interest rate-sensitive major banks in the U.S. This is a benefit to the bank during periods of rising or stable rates, but it becomes a potential liability if rates begin to fall.
The Federal Reserve has maintained steady interest rates thus far in 2025, mainly due to concerns about inflation and the economic impact of various trade policies. However, recent signs of labor market softness (along with the constant drumbeat of criticism from the Whitehouse) have increased speculation about potential rate cuts on the near horizon. Markets are now pricing in a growing probability of a 25-basis point reduction at the Fed’s September meeting, with the possibility of additional cuts in October.
For Bank of America, even modest rate reductions could create meaningful headwinds. When interest rates decline, the bank’s net interest margin tends to compress more rapidly than that of less rate-sensitive institutions. This occurs because the bank’s asset and liability structure creates a duration mismatch, where the timing of rate adjustments on different parts of the balance sheet doesn’t align perfectly.
The bank’s net interest yield, which measures profitability relative to earning assets, is a key metric to monitor the bank’s health. It declined to 1.97% in 2024 from 2.08% in 2023, recently stabilizing around 1.94% in Q2. This represents recovery from the 1.66% low point in 2021, but it shows that the bank remains vulnerable to further changes in the rate environment.
Warning Shots Across the Bow
Bank of America’s NII could be challenged in the days ahead. As labor market data continues to show signs of softening, and the economic impacts of current trade policies become clearer, the central bank may feel compelled to provide economic stimulus through lower interest rates.
Further, commercial real estate continues to face pressures that could affect loan demand and credit quality. Additionally, increased competition for deposits in a changing rate environment could pressure the bank’s funding costs, even as lending rates decline.
Management has acknowledged these challenges while maintaining a cautiously optimistic outlook. CEO Brian Moynihan has highlighted the resilience of consumer spending and the quality of the bank’s loan portfolio, but he’s also cautioned that these issues could affect future performance.
The bank’s provision for credit losses increased to $1.6 billion in the most recent quarter, up from $1.5 billion a year earlier, though provisions at the retail banking level remained flat.
Is BAC a Good Stock to Buy?
The bank’s current valuation metrics suggest it is relatively reasonably priced, with a trailing price-to-earnings ratio of 13.9x in line with its major competitors. Further, the stock shows positive price momentum, trading above its major moving averages.
Analysts following the company have been bullish on the stock. It is rated a Strong Buy overall, based on 17 Buy and 3 Hold recommendations. The average price target for the shares for the next 12 months is $52.60, which represents a potential upside of ~10% from current levels.
The Bottom Line on Bank of America
Bank of America’s recent performance has been strong. While the stock has been positively trending and sits at a reasonable valuation, its sensitivity to interest rate changes creates risks that should be carefully weighed. Federal Reserve policy and pressures from the Trump Administration suggest the potential for downside volatility for the stock.
Given the current environment, I believe it’s prudent to stay Neutral while keeping a close eye on both monetary policy developments and the bank’s ability to adapt its strategy accordingly.