BofA's (BAC) Q3 Earnings Top on Trading, Investment Banking

Improved capital market performance drove Bank of America’s BAC adjusted third-quarter 2019 earnings of 75 cents per share, which outpaced the Zacks Consensus Estimate of 50 cents. Also, the figure was up 14% from the prior-year quarter.

Results excluded merchant services joint venture impairment charges of $2.1 million. Including this charge, earnings totaled 56 cents per share.

Defying market expectations, BofA came out with improved trading and investment banking numbers. Trading revenues (excluding DVA) grew 4% as both equity trading income and fixed income trading revenues witnessed year-over-year improvement.

Additionally, investment banking fees surged 40% as both underwriting and advisory fees increased. Equity underwriting income and debt underwriting fees recorded rise of 21% and 6%, respectively. Further, advisory fees jumped 80%.

Investors cheered the unexpected impressive performance. Shares of BofA have rallied almost 2% in pre-market trading. Nonetheless, the full-day trading session will depict a better picture.

Also, marginal rise in net interest income reflects decent loan growth while lower interest rates were the offsetting factor. Moreover, despite taking several initiatives, including technology upgrades at existing ATMs and branches, and opening new branches, the company was able to manage expenses efficiently.

However, provision for credit losses increased during the reported quarter.

Overall performance of the company’s business segments, in terms of net income generation, was decent. All segments, except Global Markets and All Others, witnessed a rise in net income.

Loan Growth Aids Revenues, Adjusted Expenses Up Slightly

Net revenues amounted to $22.8 billion, which marginally beat the Zacks Consensus Estimate of $22.2 billion. Also, the reported figure was up slightly on a year-over-year basis.

Net interest income, on a fully taxable-equivalent basis, grew 1% year over year to $12.3 billion, driven by loan and deposit growth. However, net interest yield was down 4 basis points (bps) to 2.41%.

Non-interest income declined marginally from the year-ago quarter to $10.6 billion.

Non-interest expenses were $15.2 billion, up 16.6%. After excluding merchant services joint venture impairment charges of $2.1 million, adjusted operating expenses were up nearly 1%.

Efficiency ratio was 66.51%, up from 57.27% in the year-ago quarter. This included the above-mentioned impairment charges. Increase in efficiency ratio indicates deterioration in profitability.

Credit Quality: Mixed Bag

Provision for credit losses increased 9% on a year-over-year basis to $779 million.

However, net charge-offs (NCOs) declined 13% to $811 million. Notably, excluding recoveries from sales of previously charged-off non-core consumer real estate loans, NCOs increased year over year. Further, as of Sep 30, 2019, ratio of non-performing assets ratio was 0.39%, down 20 bps.

Strong Capital Position

The company’s book value per share as of Sep 30, 2019, was $26.96 compared with $24.33 on Sep 30, 2018. Tangible book value per share as of the third-quarter end was $19.26, up from $17.23 a year ago.

At the end of September 2019, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.7%, up from 11.5% as of Sep 30, 2018.

Our Viewpoint

BofA’s efforts to realign its balance sheet, focus on core operations and loan growth are likely to support bottom-line growth. Also, the bank’s efforts to digitize operations and branch expansion plans are expected to support its Consumer Banking segment. However, increasing credit costs pose a concern.

Bank of America Corporation Price, Consensus and EPS Surprise

 

Bank of America Corporation Price, Consensus and EPS Surprise

Bank of America Corporation price-consensus-eps-surprise-chart | Bank of America Corporation Quote

Currently, BofA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Big Banks

Better-than-expected underwriting business performance, rise in mortgage banking fees and higher bond trading income drove JPMorgan’s JPM third-quarter 2019 earnings of $2.68 per share, which outpaced the Zacks Consensus Estimate of $2.44.

Citigroup C delivered a positive earnings surprise of 1% in third-quarter 2019, backed by improved investment banking performance. Adjusted earnings per share of $1.98 outpaced the Zacks Consensus Estimate of $1.96. Also, earnings climbed 20% year over year.

Wells Fargo’s WFC third-quarter 2019 earnings of 92 cents per share lagged the Zacks Consensus Estimate of $1.15 on lower net interest income. The figure also comes in lower than the prior-year quarter earnings of $1.13 per share.

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