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BofA's Branch Expansion, Loan Growth Offset Fee Income Woes

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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 branch expansion strategy bodes well for future growth. 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 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 continues to align its banking center network according to the customer needs. By 2022, it intends to open 500 new centers and redesign more than 1,500 centers with technology upgrades. These branches are smaller in size and utilize advance technology, with a goal to cross-sell financial products. These efforts along with launching of Zelle and Erica will enable the bank to focus more on improving its digital offerings.

BofA’s efficient capital deployment activities look impressive. The company along with several major banks including JPMorgan (JPM - Free Report) , Wells Fargo (WFC - Free Report) and Citigroup (C - Free Report) received the Fed’s approval for their respective 2018 capital plans. BofA’s plan included 25% dividend hike and $20.6 billion share repurchase authorization. The bank is expected to sustain its capital deployment activities and continue enhancing shareholder value, driven by robust capital position.

However, BofA continues facing problems in improving fee income. Over the last five years (2013-2017), non-interest income decreased at a CAGR of 2.6%. Specifically, uncertainty related to the performance of capital markets (on which trading and investment banking businesses depend) will limit substantial non-interest income growth in the quarters ahead.

Further, mortgage banking income is witnessing a drastic downtrend due to a reduction in refinancing activities and a fall in origination volumes. A rise in interest rates is expected to further hurt mortgage fees.

Also, analysts seem to have a neutral stance on the stock. The company’s Zacks Consensus Estimate for earnings has remained stable for 2018 and 2019, respectively, over the past 30 days.

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