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BofA (BAC) Q3 Earnings Beat on Solid NII, Provisions & IB Ail

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Bank of America’s (BAC - Free Report) third-quarter 2022 earnings of 81 cents per share surpassed the Zacks Consensus Estimate of 79 cents. The bottom line compared unfavorably with 85 cents earned in the prior-year quarter. The reported quarter number included $354 million related to the settlement of “legacy monoline insurance litigation.” Our estimate for earnings was also 81 cents per share.

After reporting better-than-expected earnings, shares of the company rallied almost 3% in pre-market trading. Investors are encouraged by BofA’s quarterly performance and expectations of continued improvement in net interest income (NII). However, a deteriorating economic outlook and a slump in deal-making activities were the key headwinds.

Driven by robust loan growth (loan balances up 11.5% from the prior-year period) and rising interest rates, BofA recorded a solid improvement in NII. We had projected 13.1% growth in the loan balance.

Backed by improvement in consumer spending, the company’s consumer banking business acted as a tailwind, with revenues rising 12.1%. We had projected 13% revenue growth for this business. Also, combined credit and debit card spending rose 9%.

BAC’s trading numbers were also impressive. Sales and trading revenues (excluding DVA) were up 13% from the prior-year quarter. A 27% jump in fixed-income trading fees more than offset a 4% decrease in equity trading income.

As expected, the company’s investment banking (IB) business did not perform well. IB fees of $1.2 billion tanked 46.2% year over year in the quarter, reflecting the weaker industry-wide performance of the underwriting business. Advisory fees plunged 34% to $432 million.

Likewise, the asset management business performance was subdued. The bank posted a 10.9% decline in asset management fees in the quarter.

Overall, the company’s net income applicable to common shareholders declined 9.4% from the prior-year quarter to $6.58 billion. Our estimate for the same was $6.54 billion.

Revenues Improve, Expenses Rise

Net revenues were $24.5 billion, which beat the Zacks Consensus Estimate of $23.6 billion. The top line grew 7.6% from the prior year. Our estimate for the metric was $24.2 billion.

NII (fully taxable-equivalent basis) rose 23.9% to $13.9 billion, driven by higher interest rates, lower premium amortization and loan growth. Also, the net interest yield expanded 20 basis points (bps) to 2.06%. Our estimates for NII and net interest yield were $13.7 billion and 1.83%, respectively.

Non-interest income decreased 8% to $10.7 billion. The fall was mainly due to lower fees and commissions. We had projected non-interest income to be $10.6 billion.

Non-interest expenses were $15.3 billion, up 6%. The rise was largely due to the inclusion of the above-mentioned litigation settlement charges. Excluding this one-time charge, expenses would have been $14.9 billion. We had projected non-interest expenses to be $15.9 billion.

The efficiency ratio was 62.45%, down from 63.43% in the year-ago quarter. A decrease in the efficiency ratio indicates an improvement in profitability.

Credit Quality Deteriorates

Provision for credit losses was $898 million against a benefit of $624 million in the prior-year quarter. This was mainly attributable to credit card loan growth and worsening macroeconomic outlook

Net charge-offs rose 12.3% year over year to $520 million.

As of Sep 30, 2022, non-performing loans and leases as a percentage of total loans were 0.39%, down 12 bps year over year.

Capital Position Strong

The company’s book value per share as of Sep 30, 2022, was $29.96 compared with $30.22 a year ago. Tangible book value per share as of the third-quarter end was $21.21, down from $21.69.

At the end of September 2022, the common equity tier 1 capital ratio (Advanced approach) was 12.6%, on par with the Sep 30, 2021 level.

Conclusion

BofA’s focus on digitizing operations, loan growth, higher interest rates and branch expansion plans are likely to support growth. However, elevated expenses and near-term macroeconomic factors pose major headwinds.
 

Bank of America Corporation Price, Consensus and EPS Surprise

Bank of America Corporation Price, Consensus and EPS Surprise

Bank of America Corporation price-consensus-eps-surprise-chart | Bank of America Corporation Quote

Currently, BAC 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 loan balance, rising rates and solid markets performance drive JPMorgan’s (JPM - Free Report) third-quarter 2022 earnings of $3.12 per share, which surpassed the Zacks Consensus Estimate of $2.97. The results included $959 million or 24 cents of net investment securities losses in the Corporate segment. Our estimate for earnings was $2.98 per share.

Disappointing IB performance, bigger reserve build and increase in operating expenses hampered JPM’s quarterly performance to some extent.

Wells Fargo’s (WFC - Free Report) third-quarter 2022 adjusted earnings per share of $1.30 outpaced the Zacks Consensus Estimate of $1.09. Results excluded a $2 billion or 45 cents per share of charges related to a number of “historical matters, including litigation, customer remediation, and regulatory matters.”

Results benefited from higher NII, rising rates and solid average loan growth. Yet, dismal non-interest income, higher provisions and weakness in the mortgage business were the major undermining factors for WFC. Also, the rise in non-interest expenses acted as a headwind.

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