Bulge bracket banks kicked off second-quarter earnings, and despite a low interest rate environment, big banks delivered record numbers. Bank of America (NYSE:BAC) did particularly well, delivering its best quarter in the company’s history.
The combination of strong consumer spending activity and BAC management’s continued commitment to share repurchases has proved potent. It’s not over yet either. The company, in no uncertain terms, has committed to an additional $37 billion of dividends and share repurchases.
BAC has built further trust with their clients, and the financial results speak for themselves. Consumer banking and wealth management continue to show a lot of strength, buoyed by improvements on the digital platform. Overall performance from most business units — weakness in sales and trading was not unexpected — was very positive.
The momentum from this quarter should continue through to the next.
Happy Customers Are Good for Business
Not only did average deposits grow 3% (or by $19 billion), consumer investment assets grew a very solid 15% to $220 billion assets under management. Remember that fees generated from managing these investment assets are a lucrative business. To the extent that these client flows continue, which admittedly has been helped along by strong equity market performance, double-digit growth could very well persist next quarter.
It’s also an important revenue stream as interest income will hit some uncertainty in the remainder of the fiscal year. Net interest income rose 3% in the quarter, but if the expectation of interest rates getting lowered comes to fruition, it would pose a challenge of sustaining even low single-digit growth rates.
BAC regained its status as the leader by market share in small business lending. They are building up deeper and deeper ties to consumers and business owners. This symbiotic relationship between personal and commercial clients.
BAC Is Strong on the Digital Front
All the banks have been actively bolstering their digital platforms, and BAC has seen excellent feedback and traction. Active mobile banking users were up 10% to 27.8 million.
Zelle users haven’t quite grown at quite the desired clip, sitting at 8 million active users, but it is not just the number of active users that matters. Rather, the ability of BAC to upsell and generate revenue via the digital platform is more important. It is noteworthy then that 69 million sent and received payments via Zelle. That translates to $18 billion and a 79% increase year-over-year. So, the substantial growth in volume somewhat alleviates the concern of slower growth in total users.
Another point worth noting is that one-third of total consumer mortgage applications came from digital. Increasingly, BAC’s investment in their platform is paying dividends beyond just payments transfers.
BAC Stock Is Undeniably Cheap
In numerical terms, BAC saw consumer spending increase 5% year-over-year and share repurchases amount to 7% of the total float in the past twelve months.
This dynamic has driven a double-digit increase in book value per share, a more appropriate valuation metric for financial holding companies. Based on BAC’s calculation of $26.41 per share, BAC stock currently trades at just 1.1x. Other competitors like JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) are not expensive either, but BAC is the cheapest from this angle.
The robust earnings combined with this existing relative undervaluation should see that this imbalance does not persist for long.
As of this writing, Luce Emerson did not own any of the aforementioned securities.
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