What Has Changed at Bank of America Since Our Last Capital Allocation Look

Our prior coverage argued that Bank of America's combination of consumer banking scale, technology investment, and conservative capital position created a franchise that traded at an unjustified discount to JPMorgan. The argument rested on three specific observations. First, BAC's net interest income sensitivity was higher than peers, which would benefit the franchise as the rate cycle stabilised. Second, the consumer banking efficiency was improving as the digital channel mix expanded. Third, the trading franchise had narrowed the gap to peers without taking the same balance sheet risk.

The risks named in the original thesis were credit cycle exposure, regulatory tightening, and continued underperformance versus JPMorgan in investment banking. None of those risks materialised meaningfully in the intervening period.

First, net interest margin has expanded sequentially for four consecutive quarters. The Fed's rate trajectory through 2024-2025 has been more constructive for BAC than initially expected. The franchise's deposit beta has remained lower than the peer cohort, which means more of the rate move flows to net interest income. Quarterly NII has expanded from approximately $14 billion to over $15 billion over the period.

Second, the buyback pace has accelerated. BAC repurchased approximately $20 billion of stock in 2025, the highest pace since 2007. The CET1 ratio has remained above 11%, well above the regulatory minimum, which provides ongoing capacity for capital returns. The buyback has been timed reasonably well; the average repurchase price has been below current trading levels.

Third, the investment banking and trading franchise has performed better than expected. BAC's market share in fixed income trading has held steady at roughly 12-13%. The investment banking advisory revenue has rebounded with the broader cycle. The mix is cleaner than at peers because BAC has been less exposed to the trading-led revenue mix that we critiqued at Goldman Sachs.

The consumer bank has continued to deliver. The digital channel handles more than 65% of consumer transactions, which compresses the per-account cost. Active digital users have grown to approximately 60 million, up from 53 million two years ago. The efficiency ratio has compressed to approximately 60% from 65% three years ago.

The JPMorgan multiple premium to BAC has been roughly 1.5 to 3.0 multiple turns over the past decade. The current 2.2 turn premium sits in the middle of that range. The question is whether the gap should compress, expand, or hold.

We think the gap should compress modestly over the next twelve months. The arguments for the JPM premium are well understood: scale, business mix diversification, technology investment, management consistency. None of those arguments has weakened. The arguments against the BAC discount are also well understood: lower trading franchise depth, smaller asset management business, higher consumer banking exposure to credit cycle risk.

What has changed is that BAC's execution gap to JPM has narrowed. The technology investment, while smaller in absolute dollars, has produced comparable digital channel outcomes. The trading franchise has held share. The capital position has improved. The franchise quality differential remains real but has compressed.

We expect the relative valuation gap to compress by 50-100 basis points over the next twelve months as that execution narrative develops. Combined with the higher dividend yield and faster buyback pace, BAC should outperform JPM by 200-400 basis points cumulatively over the period.

At $48 and 11.6x forward earnings against consensus FY26 EPS of approximately $4.13, the multiple is roughly 80 basis points below the BAC 10-year average. The 10-year average has been a difficult benchmark because it includes the 2014-2016 low-rate compression years. Adjusting for the rate cycle, the franchise multiple sits at approximately fair value.

Price to tangible book sits at 1.4x. JPMorgan trades at 2.4x. The 100-percentage-point gap is wider than the ROTCE differential implies. JPMorgan delivers 17% ROTCE versus BAC's 15.7%; that 130 basis point ROTCE gap should support roughly 60-80 basis points of price-to-tangible-book differential, not a full 100 percentage points.

Buyback yield of 4-5% plus dividend yield of 2.4% produces total shareholder yield around 6.5%. Against a 10-year Treasury yield of approximately 4.4%, the equity yield premium is over 200 basis points for a stock with a 1.1 beta and an improving capital allocation framework. That is attractive.