Bank of America's NII Triumph Masks Revenue Woes: Is This a Buy or Hold?

Bank of America's Q2 2025 earnings report underscores a classic Wall Street dilemma: Can strong net interest income (NII) growth justify its valuation, or do revenue headwinds and rising costs signal caution? The answer hinges on the sustainability of its NII momentum amid macroeconomic uncertainties, expense discipline, and the ability to stabilize noninterest income. Here's the breakdown.

The NII Story: Resilience or Rate-Sensitive Illusion?

Bank of America reported a record NII of $14.8 billion, a 7% year-over-year increase, driven by disciplined deposit pricing, rising commercial loan balances, and the lagged impact of Fed rate hikes. This outperformance reflects its strategy of expanding deposits (up 3% YoY to $1.97 trillion) and commercial lending (up 10% YoY), which now accounts for 60% of total loans.

However, NII's future is tied to interest rates. Management estimates a 100-basis-point rate cut would reduce NII by $2.3 billion over 12 months—a significant risk if the Fed pivots to easing. Conversely, NII could grow further if rates remain elevated. The bank's CET1 ratio of 11.5% offers a buffer, but investors must weigh rate sensitivity against the $15.5–$15.7 billion full-year NII guidance, which assumes no major economic shocks.

The Revenue Miss: A Symptom of Broader Challenges

While NII shone, total revenue fell short of estimates ($26.5 billion vs. $26.75B expected), driven by a 9% drop in investment banking fees to $1.4 billion—a stark contrast to peers like JPMorgan, which grew fees by 3%. Global Markets revenue rose 15% to $5.4 billion, but this was offset by sluggish wealth management fees and stagnant consumer lending.

Historically, such misses have triggered mixed near-term reactions but fostered long-term resilience. For instance, after BAC's lone earnings miss since 2022 in January 2022, the stock saw a 100% win rate in the first three days but underperformed over 10 and 30-day periods. However, over a longer horizon, it achieved an average daily return of 0.54% and a peak gain of 4.54% by July 2025. This underscores the potential for short-term volatility but hints at rewards for investors willing to hold through uncertainty.

The noninterest expense ratio worsened to 64.58%, up from 63.86% a year ago, as technology investments and personnel costs rose 5% YoY. This suggests that while NII is buoyant, expense control remains a vulnerability. Management's plan to “flatten or reduce costs in H2” will be critical to maintaining margins.

Macro Risks and Credit Quality: The Elephant in the Room

Bank of America's exposure to commercial real estate (CRE), particularly office properties, looms large. While net charge-offs remained stable at $1.5 billion, elevated office CRE losses reflect a sector in flux. The bank's CET1 ratio, though robust, could face pressure if defaults escalate.

Meanwhile, the U.S. economy's resilience remains uncertain. A recession or sharp rate cut could dent NII and loan demand. Consumer credit quality—with improving card delinquency rates—offers some comfort, but commercial borrowers are more rate-sensitive.

Valuation and Dividend: A Mixed Picture

Bank of America trades at a P/E of 13.6x, above its sector average of 11.9x, but its dividend yield of 5.2% (after an 8% hike announced in Q2) and strong capital returns ($13.7B year-to-date) provide a safety net.

Its P/B ratio of 1.3x aligns with peers, but investors must decide whether to pay a premium for NII growth versus the risks of a slowing economy. The stock's 5% year-to-date gain, trailing its 52-week high, suggests skepticism about its ability to outperform in a downturn.

The Bottom Line: Hold for Now

Bank of America's NII growth is impressive, but its reliance on rate-sensitive metrics and lagging noninterest income growth (especially in investment banking) temper optimism. While its dividend and capital returns are compelling, the risks of a Fed pivot, CRE headwinds, and macro slowdowns argue for caution.

Investors should hold the stock until clarity emerges on rates and commercial lending trends. A buy case strengthens if NII exceeds its guidance and noninterest income stabilizes, but for now, the balance of risks tilts toward waiting for a better entry point.

In short, BAC's Q2 results are a glass half-full—its NII machine is firing on all cylinders, but the cracks in its revenue model and macro fragility mean this isn't the time to bet the farm.