Should You Buy Bank of America Stock After a $1.2 Billion Regulatory Fine?

Following its third-quarter earnings report, Bank of America's (NYSE: BAC) stock fell 4.7% on Oct. 14 in its worst performance in 18 months. At one point, the stock fell almost 9%, a huge move for a stock like Bank of America.

Not only did the bank report weak results, it also disclosed a $1.2 billion regulatory fine for money-laundering violations. Should investors buy the stock after the poor earnings results and regulatory fine?

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A disappointing quarter

Bank of America reported $0.91 per share in profit on revenue of $30.12 billion. Both numbers came up short of Wall Street's expectations, but excluding the $1.2 billion fine, the bank would have reported $1.08 in earnings per share, missing estimates by only $0.02.

Still, there was certainly weakness in parts of the bank's business. CEO Brian Moynihan had previously warned of a soft quarter in investment banking and trading, and that warning ultimately played out.

Investment banking fees fell nearly 16% year over year in Q3, while total sales and trading revenue fell over $2 billion from the prior quarter and was also down nearly 5.5% year over year.

On the bright side, net interest income (NII), the spread revenue banks make between the interest they pay on interest-bearing deposits such as liabilities and what they earn on interest-earning assets such as loans, increased $1.2 billion year over year to $16.6 billion in Q3.

NII is a key revenue source for most banks. On the company's earnings call, CFO Alastair Borthwick told analysts that NII should grow about 8% year over year in 2026, hitting the top end of management's guidance, which had been revised higher on multiple occasions earlier this year.

Borthwick also said the bank expects NII to grow at least 8% in 2027, assuming three quarter-point interest rate hikes between now and June 2027. Additionally, credit quality remained benign and showed no alarming deterioration during the quarter.

Anti-money-laundering fine

As mentioned, banking regulators fined Bank of America $1.2 billion in total, alleging that the money-center bank failed to report over $5 billion in suspicious transactions over several years, including those involving national security risks.

Moynihan addressed the issue on the live conference call with analysts, saying the bank has been aware of the issues and has already allocated funds and resources for remediation within its expense base.

"Just for example, this quarter, a couple hundred million dollars plus in remediation costs for that effort," he said. "So it has been substantial and thousands of employees. So we have a clear understanding of what we need to do. We are doing it. We will complete it. It is the focus of management to get it cleaned up."

While these issues are certainly serious and could be a near-term drag on the stock, I'm not overly concerned. Anti-money-laundering violations are common among money-center banks with sprawling global operations.

Should you buy Bank of America for the long term?

Bank of America stock has been disappointing over the past five years, with significant volatility. Management has also made some poor decisions, such as investing hundreds of billions of dollars in long-duration, low-yielding bonds during the pandemic's height, a decision that will continue to drag on earnings.

However, the bank also has one of the lowest-cost deposit bases among peers, if not the lowest, and a very strong commercial lending franchise, making it a major beneficiary of rising interest rates, particularly for NII.

While large money-center bank stocks like Bank of America will never blow investors away with breathless, growth-like returns, I believe they belong in your portfolio for good diversification in certain market environments and will ultimately generate solid long-term returns.

Trading at roughly 1.76 times its tangible book value, or theoretical liquidation value, the stock is slightly above its five-year average. That's a solid entry point after a sell-off in recent months.

Bank of America is an advertising partner of Motley Fool Money. Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.