Despite trading slowdown, loan growth and higher interest rates drove Bank of America Corporation’s (BAC - Free Report) third-quarter 2017 earnings of 48 cents per share, which outpaced the Zacks Consensus Estimate of 46 cents. The figure was 17% higher than the prior-year quarter.
Markets also seem to be happy with BofA’s results. In pre-market trading, the company’s shares were up nearly 1.4%. The price reaction during the full trading session will provide a better picture about how the investors accepted the results.
Impressive net interest income growth, marginal increase in equity trading income and a slight rise in investment banking fees supported revenues. Operating expenses also recorded a decline. Further, credit costs decreased despite rise in loans.
However, a fall in trading revenues (as expected) and mortgage banking losses were the undermining factors.
Overall performance of the company’s business segments, in terms of net income generation, was decent. All segments witnessed improvement in net income except Global Markets.
Loan Growth Supports Revenues, Expenses Down
Net revenues amounted to $22.1 billion, up nearly 1% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $22 billion.
Net interest income, on a fully taxable-equivalent basis, grew 9% year over year to $11.4 billion. Further, net interest yield rose 13 basis points (bps) year over year to 2.36%.
Non-interest income declined 7% from the year-ago quarter to $10.7 billion. The decrease was mainly due to lower trading income and mortgage banking loss.
Non-interest expenses were $13.1 billion, down 3% year over year. The fall in expenses reflects reduced operating costs and lower litigation expenses.
Credit Quality Improves
As of Sep 30, 2017, ratio of nonperforming loans, leases and foreclosed properties was 0.75%, down 22 bps year over year. Also, provision for credit losses fell 2% year over year to $834 million, reflecting lower losses in consumer real estate and lower energy exposure.
However, net charge-offs increased 1% from the year-ago quarter to $900 million, indicating higher losses in commercial loans.
Strong Capital Position
The company’s book value per share as of Sep 30, 2017 was $23.92 compared with $24.19 as of Sep 30, 2016. Tangible book value per share as of Sep 30, 2017 was $17.23, up from $17.14 as of Sep 30, 2016.
As of Sep 30, 2017, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.9%.
BofA’s efforts to realign its balance sheet and focus on core operations will likely support bottom-line growth. Further, the bank is well positioned to benefit from higher interest rates. As expected, fixed income trading declined. Further as interest rates move higher, mortgage refinancing is expected to continue falling.
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 Major Banks
Amid an expected trading slump and lower underwriting fees, rising rates and loan growth drove JPMorgan Chase & Co.’s (JPM - Free Report) third-quarter 2017 earnings, which easily outpaced the Zacks Consensus Estimate. Further, higher advisory fees and a slight fall in operating expenses acted as tailwinds. On the other hand, a decline in mortgage banking income was a headwind.
Despite weak fixed income market revenues, Citigroup Inc. (C - Free Report) delivered a positive earnings surprise in third-quarter 2017 on prudent expense management. Overall top-line strength was reflected, driven by higher banking and consumer banking revenues. Moreover, expenses declined on efficiency savings by the bank.
U.S. Bancorp (USB - Free Report) is scheduled to report third-quarter 2017 earnings on Oct 18.
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