Turnaround Letter Buy-rated Bank of America (BAC) reported overall good results. The bank continues to make progress with improving its profitability and capital strength, along with high (112% of 1Q19 net income) returns of capital to shareholders. Despite its impressive cost controls, it has been making sizeable investments in its digital and mobile services, physical locations, marketing, staffing and wages, and other core functions. At 1.6x price/tangible book value and 10.4x earnings per share, we think the bank’s outlook remains encouraging.
Bank of America reported its 1Q 2019 earnings on Tuesday April 16th, posting a record quarterly profit of $7.3 billion, up 6% year over year. Earnings per share increased 13% as the share count declined 7%.
BAC shares had a muted response and remain essentially unchanged since prior to the news. The results were good overall - there was nothing either spectacular or dreadful in the report. The bank is well-managed, reflected in its much-improved profits, credit quality, capital levels and cost structure (it has cut annual expenses by $30 billion, from $83 billion in 2010 to $53 billion in 2018, equivalent to Coca-Cola’s entire annual expenses). The path to our $34 price target (+14% from here) hinges on steady operating and credit cost, a resumption of revenue growth and steady payouts of excess capital.
Details of the quarter
In the quarter, overall revenue remained flat at $23 billion. The net interest margin (essentially the profit margin on its lending) excluding its Global Markets trading operations was a relatively robust 3.03%, higher by 0.10% compared to a year ago. Lower fee income combined with lower expenses and slightly higher credit losses to produce higher overall profits.
The bank’s credit quality remains high. However, charge-offs ticked slightly higher to 0.43% of loans and leases compared to 0.40% a year ago. Its credit reserves remain healthy at 1.02% of loans and leases although they are slightly smaller than the 1.11% level a year ago. Non-performing assets declined to 0.55% of loans and leases, suggesting that the bank is charging off weak credits faster. All of these metrics indicate that the bank currently has a healthy credit book.
In the quarter, Bank of America returned $7.8 billion to shareholders through $6.3 billion in share repurchases (about 1% of outstanding shares) and $1.5 billion in dividends, totaling about 112% of 1Q19 net income. Despite this high payout, the bank’s capital remains healthy. Its CET1 (common equity tier 1) capital, a widely-used regulatory capital ratio, of 11.6%, increased modestly from 11.4% a year ago and unchanged compared to year-end 2018.
Profits in the Consumer Banking segment increased to $3.2 billion, up 25% year over year. Loan growth and deposits grew 5% and 3%, respectively. The net charge-off ratio increased slightly, rising from 1.27% to 1.28% year over year.
Global Wealth & Investment Management profits increased 14%: although revenues fell 4%, operating expenses and credit costs improved. Client balances grew 4% (topping $2.8 trillion) and loans and deposits grew 3% and 8%, respectively.
Global Banking (investment banking operations) net income increased 2% to $2.0 billion.
Global Market (trading) net income fell 26% to $1 billion. Revenues decreased 13% to $4.2 billion, as equities revenue decreased 22% to $1.2 billion and fixed income revenue decreased 8% to $2.4 billion. Expenses fell 6%.
We continue to rate BAC shares a BUY with a price target of $34.
Disclosure Note: An employee of the Publisher owns BAC shares.