Bank of America (BAC): Is Its Deposit Franchise Getting Stronger as Lending Accelerates?

Bank of America Corporation (NYSE:BAC) is growing lending faster than deposits, but the more useful question is what that funding costs. Second-quarter average loans increased 8% year over year while deposits rose 2%. Consumer balances grew approximately 1%, against 8% in Global Banking. Nevertheless, net interest income increased 9%, showing that uneven deposit growth can coexist with improving lending economics.

Bank of America Corporation trades at approximately 11x forward P/E versus 13x trailing P/E. Higher lending and fee income, operating leverage, and share repurchases support the earnings improvement behind that gap. The forward valuation sits above Wells Fargo & Company at 10x and below JPMorgan Chase & Co. at 14x. It looks reasonable if inexpensive deposits sustain earnings growth after credit costs.

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Checking Relationships Still Lower Funding Costs

Bank of America Corporation increased average Consumer Banking deposits to $957 billion from $950.8 billion in the first quarter, extending the recovery from $945 billion in late 2025. The rate paid on those deposits fell to 0.48%, from 0.58% a year earlier. Growing balances while paying less interest gives the lending business a practical advantage over financing that must continually compete on yield.

Bank of America Corporation estimates that 92% of consumer checking accounts are customers’ primary accounts. Direct deposits, payments and everyday banking create reasons to stay beyond the advertised interest rate. Those relationships become an earnings advantage when customer loyalty supports profitable lending, provided technology, service and credit costs remain controlled.

For Bank of America Corporation, interest-rate changes affect both sides of the spread. Lower deposit rates reduce funding expense, while repricing older fixed-rate assets can raise income. Loan growth and market activity also contributed to net interest income of $16 billion. Tax-equivalent net interest yield, a non-GAAP measure adjusting for tax-exempt interest, increased to 2.08% from 1.94% a year earlier. The lesson from cheaper funding and better lending returns is that savings matter alongside asset yields and credit performance.

Faster Lending Must Preserve Returns

Bank of America Corporation paid 2.23% on Global Banking deposits, substantially more than on consumer balances. Corporate deposits can support lasting payments and cash-management relationships, but faster growth in this category can increase the funding mix’s sensitivity to rates. Sustained consumer deposit growth would strengthen the franchise by limiting the need to attract more expensive incremental balances.

The difference in loan and deposit growth does not indicate a funding shortage at Bank of America Corporation. Average loans of approximately $1.22 trillion remained well below $2.02 trillion of average deposits, which also fund securities and liquidity. The relevant decision is how redeployment changes earnings after funding costs, rather than whether two growth rates match. Credit deterioration could still consume the benefit of higher loan income.

Bank of America Corporation reported a 0.47% net charge-off ratio, down from 0.55% a year earlier, while its common equity tier 1 capital ratio held at 11.2% sequentially. Buybacks help EPS, but lending also consumes regulatory capital; repurchases must leave capacity for loan expansion and losses. Its forward P/E has declined from approximately 13x at year-end 2025, making the valuation less demanding alongside better lending income and credit performance. The historical discount remains sensible because deposit competition and rate-sensitive revenues can interrupt that improvement.

Profitability also explains the peer discount. Second-quarter return on tangible common equity, a non-GAAP measure, was 17%, versus 23% for JPMorgan Chase & Co. excluding specified investment gains. Stronger returns on shareholder capital can justify a higher multiple; similar earnings growth alone would not eliminate that distinction.

Conclusion

Bank of America Corporation looks fairly valued at approximately 11x forward P/E. Lower consumer funding costs and improving credit metrics support that judgment, while its modest premium over Wells Fargo & Company requires durable earnings growth. Faster consumer deposit accumulation, resilient lending spreads, and controlled losses would strengthen the case. Greater dependence on expensive deposits would weaken it.

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This article is originally published at Insider Monkey.