Just the other day, I covered Bank of America CEO Brian Moynihan addressing a $1.2 billion troubling problem for failing to report $5 billion in suspicious transactions.
You may be asking how a bank that size could let such a serious compliance issue slip through the cracks, especially when customers trust it to safeguard their money.
The $1.2 billion fine landed in a quarter when Bank of America (BAC) still brought in $30 billion in revenue, up 3% from a year ago but short of the $30.58 billion analysts expected. Reported earnings were $0.91 per share for the third quarter of fiscal 2026.
“We put lots of resources against this. Thousands of extra teammates,” Moynihan said, adding that the bank lowered its reporting thresholds and the penalty went through last quarter. He said the bank is “deep into remediation activities,’ as I highlighted previously.
However, investors want to know whether the fine and the fee miss are the last surprises.
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Bank of America’s fine and fee miss rattle the stock
Morgan Stanley’s answer is a cautious maybe. The firm kept an Overweight rating but cut its price target to $61 from $67, 18% above the $51.39 share price, in a report shared with TheStreet.
Morgan Stanley wrote that the OCC and FinCEN investigation fine and the fee miss added noise, but that the stock’s drop suggests it is “closer to being de-risked.”
Shares have slipped 5.36% this year through Oct. 16 on a total return basis, according to Yahoo Finance, and Morgan Stanley says they trade at 9.7 times 2027 earnings. It cut its target multiple to 11.5x from 12.25x. It also trimmed 2027 EPS by 3% to $5.28 and 2026 EPS by 1% to $4.59 on lower fee income.
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According to its Q3 fiscal 2026 report, Adjusted earnings of $1.08 a share missed consensus by about 1%, primarily due to weaker trading. Fixed income revenue fell 17% as clients pulled back after a sharp move in interest rates, particularly in credit, mortgages and municipal bonds. Equities still delivered a record third quarter, with revenue up 10%.
The miss was not a surprise to everyone. Management had warned in September that the quarter would be softer, and it does not expect as much of the usual fourth-quarter seasonal slowdown.
On the fine, management said the technology and people needed for remediation are already funded and in the expense run rate. It confirmed no asset cap is in place, meaning regulators have not limited the bank’s growth, and said the work will not crowd out investment elsewhere.
Why the Bank of America’s earnings engine is still running
The stronger story is net interest income (NII), the gap between what the bank earns on loans and pays on deposits.
Third-quarter NII rose about 8% from a year ago and 3% from the prior quarter, as stronger margins offset smaller earning-asset balances. Management guided to 8% growth or more in 2027, versus the 6.4% consensus expected, and Morgan Stanley models 8.6%, according to the note.
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Rates are only a small part of it, the bank says. Deposit growth is normalizing, customers are moving into higher-cost deposits more slowly, loans continue to grow, and fixed-rate loans and securities are repricing higher.
Management expects the core banking book to be stronger in 2027 than in 2026, though Morgan Stanley trimmed its NII estimate about 1% due to more conservative balance assumptions.
Behind the discipline are people. Total headcount fell despite additions to sales teams, as automation and work simplification reduced replacement hiring, management said, even as the bank continues to spend on technology, AI, and client acquisition.
Morgan Stanley sees 18% upside if Bank of America delivers
Positive operating leverage should return in the fourth quarter, management said, and it maintained its 200-300 basis-point medium-term framework. A specific 2027 guide is due later this year or with fourth-quarter results in January.
Morgan Stanley models about 260 basis points in 2027, with revenue up 7.6% and expenses up 5.1%, taking the expense ratio to 58.7%. Extra NII should increasingly reach the bottom line.
The scenarios range from $39 in a bear case at 10x earnings to $90 in a bull case at 13x.
For investors, Morgan argues that the bad news is mostly in the stock price. It says that delivering NII growth and operating leverage should reverse some of the recent multiple compressions. The fine may linger, but the bank’s verdict is that it no longer has to drive the story.
