Bank of America (BAC) Up 9.9% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Bank of America (BAC). Shares have added about 9.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Bank of America due for a pullback? 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.

Bank of America Q2 Earnings Lag Estimates, Revenues & Costs Rise Y/Y

Bank of America’s second-quarter 2022 earnings of 73 cents per share lagged the Zacks Consensus Estimate of 77 cents. The bottom line compared unfavorably with $1.03 per share earned in the prior-year quarter.

As expected, the company’s investment banking business did not perform well. IB fees of $1.1 billion plunged 47% year over year in the quarter, reflecting weaker industry-wide performance of the underwriting business. Advisory fees declined 3.7% to $392 million.

The asset management business also did not offer much support. The bank posted a 1.7% decline in asset management fees in the quarter.

Nevertheless, driven by robust growth in loans (loan balances up 12.2% from the prior-year period) and rising interest rates, BofA recorded an improvement in net interest income. Backed by improvement in consumer spending, the company’s consumer banking business acted as a tailwind, with revenues rising 12%. Also, combined credit and debit card spending rose 10%.

BAC’s trading numbers were also good. Sales and trading revenues (excluding DVA) were up 11% from the prior-year quarter. A 19% rise in fixed-income trading fees and a 2% increase in equity trading income offered support.

Overall, the company’s net income applicable to common shareholders declined 33.8% from the prior-year quarter to $5.93 billion.

Revenues Improve, Expenses Rise

Net revenues were $22.69 billion, which marginally lagged the Zacks Consensus Estimate of $22.97 billion. The top line grew 5.7% from the prior year.

NII (fully taxable-equivalent basis) rose 21.3% year over year to $12.55 billion, driven by higher interest rates, lower premium amortization and loan growth. Also, the net interest yield grew 25 basis points (bps) to 1.86%.

Non-interest income decreased 8.8% from the year-ago quarter to $10.24 billion. The fall was mainly due to lower fees and commissions.

Non-interest expenses were $15.27 billion, up 1.5% year over year. The rise was due to an increase in compensation and benefit costs, information processing and communications costs, professional fees, and other general operating expenses.

The efficiency ratio was 67.32%, down from 70.09% in the year-ago quarter. A decrease in the efficiency ratio indicates an improvement in profitability.

Credit Quality: A Mixed Bag

Provision for credit losses was $523 million against a benefit of $1.62 billion in the prior-year quarter. In the quarter, the company recorded a net reserve release of $48 million.

Net charge-offs were down 4% year over year to $571 million. As of Jun 30, 2022, non-performing loans, leases and foreclosed properties as a percentage of total loans, leases and foreclosed properties were 0.42%, down 13 bps year over year.

Capital Position Strong

The company’s book value per share as of Jun 30, 2022, was $29.87 compared with $29.89 a year ago. Tangible book value per share as of the second-quarter end was $21.13, down from $21.61.

At the end of June 2022, the common equity tier 1 capital ratio (Advanced approach) was 12.2% compared with 13% as of Jun 30, 2021.

Outlook

Given the forward curve expectation for higher interest rates and expectations of further loan growth, management expects significant NII improvement in the next several quarters.

Provided that loans and deposits grow at a modest rate, and deposit betas reflect disciplined pricing to achieve growth, management expects NII in the third quarter of 2022 to increase by at least $900 million, possibly $1 billion, from the prior-quarter end. And then, the company expects NII to grow again at a faster pace on a sequential basis in the fourth quarter.

With expectations of growing NII along with strong expense control, the company expects to drive operating leverage and see efficiency ratio of 60%.

In 2022, loan growth is expected in the mid to high-single digits.

Driven by efforts taken to eliminate non-sufficient funds (NSF) fees and reduce the overdraft charge per occurrence, the company expects fees related to these to fall 75% in 2022 from nearly $1 billion earned in 2021.

For 2022, operating expenses are projected to approximate that of the 2021 level. This assumes continuing investments in technology, strong revenue performance and inflationary costs (similar to the one experienced in the second half of 2021). It also indicates the company’s continued expense discipline, operational excellence improvements and digital transformation benefits.

For 2022, the effective tax rate (excluding any changes in the current tax laws or other unusual items) is expected to be in the range of 10-12%.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Bank of America has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. 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.

Performance of an Industry Player

Bank of America belongs to the Zacks Banks - Major Regional industry. Another stock from the same industry, State Street Corporation (STT), has gained 10.6% over the past month. More than a month has passed since the company reported results for the quarter ended June 2022.

State Street Corporation reported revenues of $2.95 billion in the last reported quarter, representing a year-over-year change of -2.7%. EPS of $1.94 for the same period compares with $1.97 a year ago.

For the current quarter, State Street Corporation is expected to post earnings of $1.81 per share, indicating a change of -9.5% from the year-ago quarter. The Zacks Consensus Estimate has changed +0.6% over the last 30 days.

State Street Corporation has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.

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