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BofA's (BAC) Interest Income Rise Offsets Fee Income Concern

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Bank of America’s (BAC - Free Report) consistent focus on improving loan and deposit balances along with higher interest rates will support net interest income (NII) growth. Further, the company’s expense control efforts are commendable. However, challenges faced by the bank in improving fee income remain a big concern.

BofA is optimistic about favorable impact of the rate hike on margins and NII in the upcoming quarters with a continued rise in loan demand. The bank’s net interest yield increased from 2.19% in 2015 to 2.25% in 2016 and to 2.37% in 2017. Further, NII witnessed a three-year CAGR of 7% (till 2017 end) driven by higher rates and loan balance.

For this year, management projects solid NII growth mainly attributable to loan and deposit growth as well as net interest yield expansion. This will be partially offset by absence of NII from the U.K. card business that was sold in 2017.

Additionally, BofA’s expense-saving plan — Project New BAC (launched in 2011) — helped improve efficiency and save as much as $8.0 billion in operating expenses annually by 2014-end. Further, the same declined at a three-year (2015-2017) CAGR of 2.6%. The company remains committed to align its banking center network according to customers’ needs, through divestitures/consolidations of branches.

BofA remains on track to reach its expense target of nearly $53 billion by 2018. Also, expenses are projected to remain relatively stable in 2019.

Driven by strong fundamentals and upbeat outlook, BofA’s share price has increased 9.7% so far this year, outperforming the 6.1% rally for the industry it belongs to.

However, BofA is facing problems in improving fee income. Over the last five years (2013-2017), non-interest income decreased at a CAGR of 2.6%. Mortgage banking income is witnessing a drastic downtrend due to a reduction in refinancing and a fall in origination volumes. A rise in interest rates is expected to further hurt mortgage fees.

Also, absence of significant volatility and low client activity (as witnessed in major part of 2017) are likely to result in muted trading and investment banking revenue growth in the quarters ahead.

Thus, analysts seem to have a neutral stance on the stock. The company’s Zacks Consensus Estimate for earnings has remained stable at $2.46 and $2.76 for 2018 and 2019, respectively, over the past 30 days. Thus, the stock carries a Zacks Rank #3 (Hold).

Some banks worth a look are BB&T Corporation (BBT - Free Report) , Citigroup (C - Free Report) and Civista Bancshares, Inc. (CIVB - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for BB&T has been revised 6.5% upward for the current year in the last 60 days. The company’s share price has rallied 25.5% in the past six months.

Citigroup has witnessed 4.9% upward earnings estimate revision for 2018 in the last 60 days. Its share price has increased 8.5% in the past six months.

Civista Bancshares stock has gained 8% over the past six months. Its earnings estimates for 2018 have moved up 11.6% in the last 60 days.

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