KBW downgrades Bank of America, says Fed rate cuts will hit earnings

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Bank of America financial center manager, center, shows a customer how to use the ATM with Teller Assist station in Cherry Creek.

Andy Cross | Denver Post | Getty Images

Keefe, Bruyette & Woods (KBW) lowered its rating on Bank of America shares to market perform from outperform, saying the bank is facing earnings pressure from expected further interest rate cuts by the Federal Reserve.

“Our expectation that the economy would accelerate post the cut in the fed funds rate has not played out as expected,” KBW analyst Brian Kleinhanzl said in a note to investors on Thursday.

The firm believes the Fed will continue to cut interest rates as the trade war with China continues. Kleinhanzl said KBW sees “no end in sight for the trade war,” further weighing on Bank of America’s stock as well as long-term interest rates.

Bank of America shares were unchanged in premarket trading from its previous close of $28.12 a share. KBW also lowered its price target to $36 a share from $29 a share.

KBW expects Bank of America will continue on its current growth strategy and remain “a prudent underwriter.”

“However, those positives are not enough to offset our lower net interest income expectations near term,” Kleinhanzl said. “We do expect returns to remain well above the cost of capital even in a falling rate environment but we remain neutral on shares while we wait for new catalysts to emerge that will drive earnings and returns higher.”

– CNBC’s Michael Bloom contributed to this report.

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