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Why Is Bank of America (BAC) Down 5.8% Since Last Earnings Report?

Zacks Equity Research
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A month has gone by since the last earnings report for Bank of America (BAC). Shares have lost about 5.8% in that time frame, underperforming 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 drivers.

BofA Q1 Earnings Beat on Loan Growth, Higher Rates

Loan growth and higher interest rates drove Bank of America’s first-quarter 2019 earnings of 70 cents per share, which outpaced the Zacks Consensus Estimate of 65 cents. Also, the figure was up 13% from the prior-year quarter.

Net interest income growth (driven by higher interest rates and decent loan growth) majorly supported the top line. Further, operating expenses recorded a decline.

As expected, investment banking performance was weak as both equity and debt underwriting revenues declined, while advisory fees improved. Additionally, equity and fixed income trading was dismal, leading to decline in trading revenues. Further, card fees and service charges on deposits decreased.

Moreover, 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 Others, witnessed a rise in net income.

Lower Trading, Investment Banking Hurt Revenues, Expenses Down

Net revenues amounted to $23 billion, which marginally lagged the Zacks Consensus Estimate of $23.2 billion. Also, the reported figure was down slightly on a year-over-year basis.

Net interest income, on a fully taxable-equivalent basis, grew 5% year over year to $12.5 billion, driven by higher rates, and loan and deposit growth. Furthermore, net interest yield expanded 9 basis points (bps) to 2.51%.

Non-interest income decreased 6% from the year-ago quarter to $10.6 billion. The fall was mainly due to lower fees and commissions, and decline in trading account income.

Non-interest expenses were $13.2 billion, down 4% year over year.

Efficiency ratio was 57.10%, down from 59.61% in the year-ago quarter. Decline in efficiency ratio indicates improved profitability.

Credit Quality: A Mixed Bag

Provision for credit losses increased 21% on a year-over-year basis to $1 billion. Further, net charge-offs rose 9% to $991 million, mainly due to an increase in commercial and consumer credit card portfolios.

However, as of Mar 31, 2019, ratio of non-performing assets ratio was 0.55%, down 17 bps.

Strong Capital Position

The company’s book value per share as of Mar 31, 2019, was $25.57 compared with $23.74 on Mar 31, 2018. Tangible book value per share as of first-quarter end was $18.26, up from $16.84 a year ago.

At the end of March 2019, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.9%, up from 11.3% as of Mar 31, 2018.

Share Repurchase Update

During the reported quarter, BofA repurchased shares worth $6.3 billion.

Outlook

The company expects NII in second-quarter 2019 to be negatively impacted by higher funding of client activity in global markets related to the European dividend season. Further, benefits from loan growth and one additional day of interest will likely be offset by paydowns on year-end credit card balances and higher prepayment of mortgage backed securities.

Additionally, during the second half of the year, NII is projected to benefit from growth in loan and deposits, and an additional day of interest in the third quarter. For 2019, management anticipates NII to be up nearly 2%, based on the assumption of flattish yield curve, no rate hike, and modest loan and deposit growth.

Net interest yield is expected to decline marginally in the second quarter, given the adverse impact of the above-mentioned factors impacting the quarter.

In 2019, core loan growth is anticipated to be in the low-single digits.

In 2019 and 2020, operating expenses are projected to be near reclassified 2018 level (on adjusted basis).

Net charge-offs (NCOs) are expected to remain approximately $1 billion in each of the remaining quarters of 2019, on the assumption of no change on current economic conditions. Further, provisions are expected to roughly match NCOs in sync with loan growth.

The effective tax rate (in absence of unusual items) is expected to be roughly 19%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, Bank of America has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% 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.

Outlook

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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