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Why is BofA (BAC) Up 4% Since Last Earnings Report?

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It has been about a month since the last earnings report for Bank of America Corporation (BAC - Free Report) . Shares have added about 4% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is BAC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

BofA Tops Q1 Earnings on Higher Rates, Equity Trading

Despite dismal investment banking performance, higher interest rates, trading rebound and tax cuts drove Bank of America’s first-quarter 2018 earnings of 62 cents per share, which outpaced the Zacks Consensus Estimate of 59 cents. Also, the figure was 38% higher than the prior-year quarter.

Net interest income growth (driven by higher interest rates), higher card income, impressive equity trading income (up 38%) supported revenues. Operating expenses recorded a decline. Additionally, provision for credit losses remain stable.

As expected, investment banking fees declined. Further, fixed income trading revenues fell 13% while mortgage banking fees were lower on decrease in loan production.

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 $23.1 billion, beating the Zacks Consensus Estimate of $22.9 billion. Also, it was up nearly 4% from the prior-year quarter.

Net interest income, on a fully taxable-equivalent basis, grew 4% year over year to $11.8 billion. Further, net interest yield was stable at 2.39%.

Non-interest income increased 3% from the year-ago quarter to $11.5 billion. The rise was mainly driven by improvement in trading income, partially offset by lower mortgage banking income and investment banking fees.

Non-interest expenses were $13.9 billion, down 1% year over year.

Credit Quality Improves

Provision for credit losses was relatively stable on a year-over-year basis at $834 million. Also, net charge-offs declined 2% from the year-ago quarter to $911 million.

Further, as of Mar 31, 2018, ratio of nonperforming loans, leases and foreclosed properties was 0.72%, down 12 basis points year over year.

Strong Capital Position

The company’s book value per share as of Mar 31, 2018 was $23.74 compared with $24.74 as of Mar 31, 2017. Tangible book value per share as of Mar 31, 2018 was $16.84, down from $17.22 as of Mar 31, 2017.

As of Mar 31, 2018, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.3%, up from 11.0% as of Mar 31, 2017.

Outlook

In 2018, management expects NII growth to be solid driven by loan and deposit growth as well as net interest yield expansion, partially offset by absence of NII from the U.K. card business that was sold in 2017.

Additionally, on an FTE basis, NII is anticipated to fall nearly $120 million each quarter owing the tax act.

The company remains on track to reach its expense target of nearly $53 billion by 2018. Also, expenses are projected to remain relatively stable in 2019 and 2020.

For 2018, GAAP tax rate (in absence of unusual items) is expected to be roughly 20%.

The company expects CET1 under an advanced basis to be more than 10% by 2019. Management anticipates return on tangible common equity to be 13.5%, over the long term.

In the medium term, management projects loan growth to be in a low single digit led by improvement in consumer loans (especially mortgage). Also, auto and card portfolios are anticipated to witness a rise, partially offset by continued run off from home equity loans.

Management expects provisions to roughly match net charge offs as reserve releases moderate gradually as the company builds allowance in sync with loan growth. Further, the company expects credit card NCO rate to be nearly 3% for 2018.

Management expects to return more capital to shareholders given the benefits from the tax act.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been four revisions higher for the current quarter compared to two lower.

VGM Scores

At this time, BAC has a strong Growth Score of A, though it is lagging a lot on the momentum front with a C. The stock was also allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Interestingly, BAC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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