BofA (BAC) Beats Q2 Earnings on Loan Growth & Higher Trading

Despite dismal investment banking performance, loan growth, better-than-expected trading activities and tax cuts drove Bank of America’s BAC second-quarter 2018 earnings of 63 cents per share, which handily outpaced the Zacks Consensus Estimate of 57 cents. Also, the figure was 43% higher than the prior-year quarter.

Shares of BofA rose nearly 1.2% in the pre-market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

Net interest income growth (driven by higher interest rates and loan growth), higher card income and rise in trading income (up 7%) supported revenues. Operating expenses also recorded a decline.

As expected, investment banking fees declined. Further, mortgage banking fees were lower on decrease in loan production. Additionally, provision for credit losses increased during the quarter.

Overall performance of the company’s business segments, in terms of net income generation, was decent. All segments witnessed improvement in net income.

Loans & Higher Rates Aid Revenues, Expenses Down

Net revenues amounted to $22.6 billion, beating the Zacks Consensus Estimate of $22.5 billion. However, it dipped 1% from the year-ago quarter. Notably, the prior-year quarter included pre-tax gain on the sale of non-U.S. consumer card business. Excluding this, revenues were up 3%.

Net interest income, on a fully taxable-equivalent basis, grew 5% year over year to $11.8 billion. Further, net interest yield increased 4 basis points (bps) to 2.38%.

Non-interest income decreased 7% from the year-ago quarter to $11 billion. The decline was mainly due to lower investment banking fees and absence of above-mentioned pre-tax gain.

Non-interest expenses were $13.3 billion, down 5% year over year.

Credit Quality Deteriorates

Provision for credit losses increased 14% on a year-over-year basis to $827 million. Lower reserve releases, loan growth and seasonality in consumer credit card portfolio led to the increase.

Also, net charge-offs rose 10% from the year-ago quarter to $996 million.

However, as of Jun 30, 2018, ratio of nonperforming assets ratio was 0.66%, down 12 bps year over year. This was largely driven by sale of non-core mortgage loans and credit quality improvement in energy portfolio.

Strong Capital Position

The company’s book value per share as of Jun 30, 2018 was $24.07 compared with $24.85 as of Jun 30, 2017. Tangible book value per share as of Jun 30, 2018 was $17.07, down from $17.75 a year ago.

At the end of June 2018, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.5%, stable year over year.

Our Take

BofA’s efforts to realign its balance sheet and focus on core operations will likely support bottom-line growth. Also, the bank is undertaking efforts to digitize operations with increased spending on technology.

Further, it is well positioned to benefit from loan growth, while flattening of yield curve remains a concern. Mortgage banking income continued to decline due to lower volumes and a fall in refinancing activity. Also, investment banking performance was disappointing. These are expected to have an adverse impact on the company’s revenues.

Bank of America Corporation Price, Consensus and EPS Surprise

 

Bank of America Corporation Price, Consensus and EPS Surprise | 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

Higher-than-expected trading revenues and rise in demand for loans drove JPMorgan’s JPM second-quarter 2018 earnings of $2.29 per share, which outpaced the Zacks Consensus Estimate of $2.22. The figure was up 26% from the prior-year quarter.

Impacted by lower mortgage banking revenues, Wells Fargo WFC recorded a negative earnings surprise of 3.6% in second-quarter 2018. Adjusted earnings of $1.08 per share missed the Zacks Consensus Estimate of $1.12. Results were in line with the prior-year quarter earnings.

Driven by top-line strength, Citigroup C delivered a positive earnings surprise of 5.2% in second-quarter 2018. Earnings from continuing operations per share of $1.62 for the quarter easily outpaced the Zacks Consensus Estimate of $1.54. Also, earnings were up 28% year over year.

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