Bank Of America Pressured By Low Oil Prices - Sell Now

OPEC Says Oil Will Remain Low Until at Least 2040

On Dec. 23, the Organization of the Petroleum Exporting Countries, or OPEC, projected that oil prices will remain at historic lows until at least 2040 before they rebound to $100 a barrel. On Dec. 22, the price per barrel fell to $36. The projections for continued low demand for oil could spell trouble for both the oil industry as well as the financial sector. With ongoing low demand and low prices, oil companies may have difficulty with repaying loans from banks, such as Bank of America (NYSE: BAC). Bank of America has an exposure of 6 percent through oil commercial credit loans. Continued low oil prices could have a deleterious effect on BAC's stock values.

How BAC Might Be Affected

Each year, large banks like BAC are required to submit to a stress test by the federal government. This test is designed to make certain banks will be able to continue trading despite market pressures. The test presumes that banks will continue to pay dividends on their earnings throughout the year. As one of the five largest investment banks for the oil industry, BAC stands to suffer losses from their oil investment business. It is possible that as they do, they will also need to cut their dividends as well.

Continued Lagging Performance

The earnings per share for Bank of America stands at $1.35, for a growth over the past year of -60.0 percent. The bank's return on investment is currently 6.60 percent. BAC is predicting that it will have an earnings per share increase of 9.29 percent in 2016. Through Sept. 2015, BAC had an increase in bad balances for its commercial credit business of $2 billion. The bank attributed a large portion of those bad balances to defaults on energy sector loans. Deutsche Bank (NYSE:DB) is also predicting that other large investment banks in the oil industry, including JP Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C) will also face similar problems during the upcoming year.

Recommendation: Sell BAC To Avoid Further Losses

OPEC's projection for long-term low prices per barrel of oil pose risks for banks that have significant exposure to the energy sector. With lower prices, the oil industry is much more likely to default on their commercial loans, leading to heightened losses for BAC's commercial credit investments. It is thus possible that BAC will be forced to cut its dividends in 2016. Investors should be cautious before investing in BAC or any of the large investment banks that have large percentages of energy sector commercial loans.