Baird Upgrades Bank of America, Calling Post-Earnings Selloff Overdone

Wall Street is split on Bank of America (BAC) after a messy quarter. Baird isn't: the firm upgraded the stock to Outperform from Neutral on Thursday and kept a $62 price target, about 21% above Wednesday's $51 close, according to CNBC.

Baird's argument is simple. The post-earnings drop went too far, and the bank's 2027 net interest income outlook is an "incremental positive" at a valuation that already looks cheap.

It's worth being clear about how bad the quarter looked. Profit fell 17% to $6.93 billion, or 91 cents a share, after a $1.2 billion penalty from U.S. regulators that cost about 17 cents. Excluding it, EPS was $1.08 against the $1.10 LSEG consensus.

Revenue of $30.12 billion also missed the $30.69 billion estimate, mostly because of trading. Fixed income revenue dropped 17% to $2.55 billion, and equities, though up 10% to $2.51 billion, still fell about $300 million short, CNBC reported.

Wells Fargo analyst Mike Mayo called the capital markets results "easily worst in class." Shares fell almost 5% on Wednesday.

"It's not that you can't absorb a billion. … But obviously it's a reputational and confidence issue." — Vivek Juneja, Analyst, JPMorgan

Here's what Baird is looking past. Net interest income, the spread between what the bank earns on loans and pays on deposits, rose 7.9% to $16.6 billion. Net interest yield improved to 2.16%, up 15 basis points from last year.

Loans grew for the tenth straight quarter, with average loans up about 6% and deposits reaching $2 trillion. The bank also returned $8.3 billion to shareholders in the quarter, based on Yahoo Finance's rundown of the upgrade.

Management tried to settle nerves. The CFO said remediation work is already built into the expense base and that no asset cap restricts client business. The bank still expects net interest income growth of about 8% this year and 8% or more in 2027, plus 200 to 300 basis points of positive operating leverage.

Valuation is where the call gets interesting. Baird says the stock trades near 10 times estimated 2027 earnings, versus a current P/E of 11.84, which is a discount for a bank still growing its core earnings.

The company has also been steady where it counts for income investors. A bank that can return $8.3 billion in a single quarter, even while paying a $1.2 billion fine, isn't short on capital, and that gives management room to keep buying back stock if the shares stay depressed.

Now the counterpoint. CEO Brian Moynihan wouldn't commit to a timeline for resolving the regulatory issues, saying "we got to do the work, and then the regulators look at it." Until that clears, the control questions can keep weighing on the stock.

Trading is another worry. Moynihan told analysts last month that trading revenue would be roughly flat, and instead it fell 5%. The CFO also warned that markets-related interest income could dip in 2027 if rates keep rising, and bond trading already took a hit from rates climbing 85 basis points in a quarter.

For investors, the case is a core bank that's working, a one-time fine, and a price that already reflects plenty of bad news. The call works best if you're willing to wait on a regulatory fix rather than expect a quick rebound.

It's also worth remembering that Baird kept its price target unchanged. The upgrade is a call on the stock's sell-off, not a claim that the bank's earnings power suddenly improved, which makes it a valuation argument more than a growth story.

Levels to watch: Baird's $62 target is the upside marker, while the roughly $51 Wednesday close is the line to see if the selloff truly is finished. A confirmed timeline from regulators would be the catalyst that matters most.

Bottom line: Bank of America missed on trading and paid a fine, but the engine that drives its profit kept running. Baird is betting the market will notice.