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Minus the Fireworks, Bank of America Corp Is Still a Great Company

Aaron Levitt

By definition, banks are supposed to be boring. The problem for Bank of America Corp. (NYSE:BAC) is that it — along with many of its money center rivals — has become anything but boring. As one of the biggest banks in the world, let along the United States, BAC is expected to knock it out of the park and be exciting.

Minus the Fireworks, Bank of America Corp Is Still a Great Company

Source: Mike Mozart via Flickr

So, when the company reported just OK earnings recently, most investors didn’t even bat an eyelash.

But that doesn’t mean that BAC isn’t a good bank. On the contrary, it actually means that Bank of America is a great bank. With trading out of the way, BAC has been able to focus on more traditional banking roles. And, in the end, that’s great for shareholders.

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A Sort of Fizzle for BAC

For BAC, the firm’s recent earnings report could only be described as a mixed bag. The real sour note came down to trading. Like Citigroup Inc (NYSE:C),  JPMorgan Chase & Co. (NYSE:JPM) and its other big bank rivals, Bank of America has made a pretty penny over the years from trading revenues. Whether that be fixed income, stocks or derivatives, trading has driven much of the show at BAC and other big financial firms.

However, two forces have been working against BAC in this regard of late.

One is regulation. Since the credit crisis and the launch of Dodd-Frank, much of the former trading activity at the big banks has been stifled. The second point has more to do with our current environment. Historically low volatility in global financial markets has made profits in trading hard to come by. For Bank of America, that’s hurt bottom line over the last few quarters.

This quarter, particularly, stung for BAC. The firm reported a 22% decline in fixed-income trading revenues.

But here’s where it gets good for Bank of America. Retail and commercial banking has taken over the show and this last quarter could be a real turning point for the bank. That’s because deposits, loan growth, and critical net interest rate margins between the two have expanded.

This quarter, BAC reported net interest income of $11.4 billion, loans of $927.1 million and deposits of $1.284 trillion — all of which topped analyst expectations. That’s all great considering the relationship these three numbers have.

In a nutshell, net interest margins (NIM) is how much profit a bank makes from making loans and what it pays consumers for their deposits. Loans are generally tied to interest rates. So when the Fed raises rates — as is the case now — banks can charge more for their loans. Meanwhile, consumer deposit rates often move up more slowly. The spread is pure profit for the bank and BAC has steadily seen rising NIM revenues over the last year.

With net interest margins up 5.6% year-over-year and deposit volumes up 4.4% during the same time period, Bank of America is sitting pretty to keep a steady stream of profits rolling its way — even with trading falling by the wayside.

BAC Focus on Tech Is All Consumer Based

But Bank of America’s continued focus on consumer and retail banking is underscored by its tech initiatives. BAC has invested heavily in its mobile and digital apps and operations. And these operations have started to significantly bear fruit. Retail consumers have begun to place less emphasis on branch visits.

For the latest quarter, BAC processed more than $1.2 billion in mobile interactions — a 20% increase from last year. Bank of America estimates that the number of mobile transactions, including 21% of all its check deposits, would equate to roughly 1,100 of its branches. Meanwhile, Zelle peer-to-peer transfers clocked in at about $4 billion for the quarter.

In the end, all of this mobile growth is really a cost-cutting story. This is now the third quarter of sequential cost declines for the bank. And that’s great, as it ultimately means higher profits for BAC. That’s especially true when you factor in higher net interest margins.

BAC Is Now a Better Bank

With trading running less of the show, BAC can really finally shine — and it is doing just that. Bank of America has all the ingredients to becoming a better and safer overall bank for investors. As the economy moves forward, the Fed raises rates and the bank continues to cut costs, investors are getting access to a real profit machine.

Even better is that BAC stock continues to trade for peanuts. Right now, it can be had for a forward price-earnings ratio of just 12, based on 2018 earnings estimates. That number drops to just a 10 P/E when looking at 2019’s earnings estimates. And these estimates don’t even include potential Fed raises or Bank of America’s ability to cut costs or further mobile growth.

In the end, Bank of America may not have the trading fireworks behind it anymore, but it’s a much better overall banking franchise.

And that should please investors.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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