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Bank of America (BAC) Down 9.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Bank of America (BAC). Shares have lost about 9.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Bank of America Q1 Earnings Beat on Solid Lending, Lower Costs

Bank of America’s first-quarter 2022 earnings of 80 cents per share outpaced the Zacks Consensus Estimate of 76 cents. The bottom line compared unfavorably with 86 cents earned in the prior-year quarter. Results in the quarter included net reserve release of $362 million.

Driven by a solid improvement in the lending scenario (loans up 10% from the prior-year period) and rising interest rates, BofA recorded substantial NII growth. Backed by improvement in consumer spending and strong economic growth, the company’s consumer banking business acted as a tailwind, with revenues rising 9.2%. Also, combined credit and debit card spending rose 15%.

The asset management business offered support too. The bank posted a 9.5% increase in asset management fees during the quarter. Further, lower non-interest expenses were a tailwind.

During the quarter, BAC recorded a provision for credit losses largely due to the Russia issue while releasing reserves.

As expected, the company’s IB fees of $1.5 billion plunged 35.1% during the first quarter, given the industry-wide disappointing performance of the underwriting business. Advisory fees grew 18.3% to $473 million.

Also, BAC’s trading numbers were not so impressive. Sales and trading revenues (excluding DVA) tanked 8.5% from the prior-year quarter. An 18.5% fall in fixed income trading fees was a major upsetting factor, while 9.5% growth in equity trading income offered some support.

Performance of the company’s business segments, in terms of net income generation, was solid. All segments, except Global Markets, Global Banking and All Others, witnessed an improvement in net income. Overall, net income declined 12.2% from the prior-year quarter to $7.07 billion.

Loan Growth, Higher Rates Aid Revenues, Expenses Down

Net revenues were $23.23 billion, which marginally beat the Zacks Consensus Estimate of $23.22 billion. The top line grew 1.8% from the prior-year level.

NII (fully taxable-equivalent basis) rose 13.3% year over year to $11.68 billion, driven by solid deposit growth, rise in loan balance, higher long-end interest rates and investment of excess liquidity. Also, net interest yield grew 1 basis point to 1.69%.

Non-interest income decreased 7.8% from the year-ago quarter to $11.66 billion. The fall was mainly due to lower IB revenues.

Non-interest expenses were $15.32 billion, down 1.3%. The decline was mainly due to lower compensation and benefit costs.

Efficiency ratio was 65.95%, down from 67.98% in the year-ago quarter. A decrease in the efficiency ratio indicates an improvement in profitability.

Credit Quality Impressive

Provision for credit losses was $30 million against a benefit of $1.86 billion in the prior-year quarter. This was driven by reserve build related to Russian exposure and loan growth. During the quarter, the company recorded a net reserve release of $362 million.

Net charge-offs plunged 52.4% to $392 million. As of Mar 31, 2022, non-performing loans and leases were 0.47%, down 11 bps.

Strong Capital Position

The company’s book value per share as of Mar 31, 2022, was $29.70 compared with $29.07 a year ago. Tangible book value per share as of first-quarter-end was $20.99, up from $20.90.

At the end of March 2022, common equity tier 1 capital ratio (Advanced approaches) was 12% compared with 13% as of Mar 31, 2021.

Share Repurchase Update

During the quarter, Bank of America repurchased shares worth $2.6 billion.

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 grow as expected and rates in the forward curve materialize, the company expects NII in the second quarter of 2022 to increase by more than $650 million over the prior-quarter level and then increase significantly on a sequential basis in each of the following two quarters of 2022.

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

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 one experienced in the second half of 2021). It also indicates the company’s continued expense discipline, operational excellence improvements and digital transformation benefits.

In second-quarter 2022, expenses are expected to be down modestly on a sequential basis, as much of the seasonal payroll tax related costs decline and is somewhat offset by investment timing, inflation and the cost of opening up more fully for travel and clone entertainment.

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?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, Bank of America has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile 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 trending downward for the stock, and the magnitude of these revisions has been net zero. 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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