It has been about a month since the last earnings report for Bank of America (BAC). Shares have lost about 2.7% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Bank of America due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
BofA Beats Q3 Earnings on Loan Growth & Higher Rates
Despite dismal investment banking and trading performance, loan growth, higher interest rates and tax cuts drove Bank of America’s third-quarter 2018 earnings of 66 cents per share, which handily outpaced the Zacks Consensus Estimate of 62 cents. Also, the figure was 44% higher than the prior-year quarter.
Net interest income growth (driven by higher interest rates and loan growth), higher card income and rise in equity underwriting fees (up 26%) supported revenues. Operating expenses also recorded a decline. Additionally, provision for credit losses decreased during the reported quarter.
As expected, trading revenues declined, as both equity and fixed income trading witnessed a slowdown. Also, advisory fees and debt issuance fees recorded a fall. Further, mortgage banking fees were lower on decrease in loan production.
Overall performance of the company’s business segments, in terms of net income generation, was decent. All segments witnessed improvement in net income.
Loans & Higher Rates Aid Revenues, Expenses Down
Net revenues amounted to $22.8 billion, beating the Zacks Consensus Estimate of $22.6 billion. Also, the reported figure grew 4% from the year-ago quarter.
Net interest income, on a fully taxable-equivalent basis, grew 5% year over year to $12 billion. Furthermore, net interest yield expanded 6 basis points (bps) to 2.42%.
Non-interest income increased 2% from the year-ago quarter to $10.9 billion. The rise was mainly due to higher card fees, partly offset by a fall in investment banking income.
Non-interest expenses were $13.1 billion, down 2% year over year.
Credit Quality Improves
Provision for credit losses decreased 14% on a year-over-year basis to $716 million. Also, as of Sep 30, 2018, ratio of non-performing assets ratio was 0.59%, down 16 bps year over year. This was largely attributable to credit quality improvement in consumer and commercial loan portfolios.
However, net charge-offs rose 4% from the year-ago quarter to $932 million. The increase was primarily driven by credit card portfolio seasoning and loan growth.
Strong Capital Position
The company’s book value per share as of Sep 30, 2018, was $24.33 compared with $23.87 as of Sep 30, 2017. Tangible book value per share as of Sep 30, 2018, was $17.23, up from $17.18 a year ago.
At the end of September 2018, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.5%, down from 11.9% as of Sep 30, 2017.
In 2018, management expects NII growth to be solid driven by loan and deposit growth as well as net interest yield expansion, partially offset by absence of NII from the U.K. card business that was sold in 2017.
Additionally, on an FTE basis, NII is anticipated to fall nearly $120 million each quarter owing the tax act.
The company remains on track to reach its expense target of nearly $53 billion by 2018. Also, expenses are projected to be around $53.5 billion in 2019 and 2020.
The effective tax rate (in absence of unusual items) in fourth-quarter 2018 is expected to be marginally higher from the third-quarter level. Further, it is expected to be roughly 20% in 2018.
The company expects CET1 under an advanced basis to be more than 10% by 2019. Management anticipates return on tangible common equity to be 13.5%, over the long term.
In the medium term, management projects loan growth to be in a mid-single digit led by modest improvement in consumer loans. Specifically, auto and card portfolios are anticipated to witness a rise, partially offset by continued run off from home equity loans and expectation of flat to down auto loan growth.
Management expects provisions to roughly match net charge offs as reserve releases moderate gradually as the company builds allowance in sync with loan growth, particularly in card. Further, the company expects credit card NCO rate to be nearly 3% for 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
Currently, Bank of America has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Bank of America has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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