Bank of America Corp Marks Beginning of Secular Growth
In light of recently-reported quarterly results from peers and rivals like Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM), the prior quarter’s numbers from Bank of America Corp (NYSE:BAC) weren’t particularly surprising. That is, B of A did rather well on most fronts, save trading, and bond trading in particular. Owners of BAC stock were also prepared to hear that the recent tax overhaul took a sizeable but one-time toll on the bottom line, even as it set the stage for major long-term growth.
Still, Bank of America isn’t a carbon copy of its competitors, and a couple of things about its fourth quarter merit a closer look.
BAC Stock Earnings Recap
For its fourth fiscal quarter ending in December, Bank of America turned $20.4 billion worth of revenue into a profit of $2.4 billion, or 20 cents per share of BAC stock.
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It’s a report, however, that comes with a huge asterisk. Had it not been for new tax rules that sparked the booking of a one-time charge of $2.9 billion, B of A would have reported a profit of $5.3 billion, or 47 cents per share. Analysts were only calling for earnings of 44 cents per share of BAC stock, but they were also modeling a top line of $21.3 billion.
Business was strong almost across the board. As chief financial officer Paul Donofrio said in the official company release, “Client activity was strong across all of our businesses in 2017. We grew average deposits by $47 billion, or 4 percent, and we increased average loan balances in our business segments by $45 billion, or 6 percent.”
CEO Brian Moynihan added, “Responsible growth delivered solid results in 2017. Pretax earnings rose 17 percent, and we continued to close in on our long-term return targets.”
Nevertheless, trading revenue was down 9% year-over-year, largely thanks to waning interest in fixed income instruments. Equity trading revenue was flat, while bond trading revenue fell 13% year-over-year.
Then again, in light of the fact that the year-ago comparison included all the trading action inspired by Donald Trump’s surprise election victory, the bar was set rather high. All things considered, the numbers aren’t bad.
Takeaways on BAC Stock
While Bank of America didn’t throw any curve balls at investors, there are a couple of items worth chewing on.
One of them is the ongoing cost-cutting effort the company has been making for a couple of years now. As far back as the middle of 2016, it had managed to cull nearly one-fourth of its spending, and Moynihan was looking to reduce B of A’s operating costs by another $5 billion by 2018. He’s more or less done it, boosting the bottom line a little more than BAC stock owners may have been expecting during that time.
If shareholders are looking for more of the same cost cuts going forward though, they may want to think again. In Q4, the bank’s expense ratio was pared down to 60% for the first time in a long, long time, putting it on par with its peers. It’s unlikely Bank of America will be able to reduce any more spending without doing more damage than good.
It’s also worth reiterating that, while new tax laws cost B of A $2.9 billion last quarter, it was a paper-only expense.
Either way, the same tax plan overhaul that cost the bank a little money last quarter also sets the stage for economic growth that could yield profit growth by many times that amount. Moynihan commented more than a month ago of the plan, “It will unleash some activity, no question. It’s good for corporate America, and it’s good for us.”
The bullish tide should pick up where the cost-cutting left off.
Looking Ahead for BAC Stock
Bank of America did not provide earnings guidance with its fourth-quarter report, but prior to the release of the numbers on Wednesday, analysts were calling for revenue of $23.0 billion and earnings of 56 cents per share for the quarter currently underway. Both are better than figures a year ago, when the bank reported a top line of $22.45 billion and income of 41 cents per share of BAC stock.
For all of 2018, analysts are modeling revenue of $92.47 and a profit of $2.36 per share. The company saw revenue of $87.4 billion in 2017, and posted a per-share operating profit of $1.83.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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