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BofA (BAC) Beats Q4 Earnings & Revenue Estimates, Costs Down

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Despite dismal investment banking and fixed income trading performance, loan growth, higher interest rates and a slight fall in costs drove Bank of America’s (BAC - Free Report) fourth-quarter 2018 earnings of 70 cents per share, which handily outpaced the Zacks Consensus Estimate of 63 cents. Also, the figure was up 49% from the prior-year quarter (excluding the impact of the tax act).

Shares of BofA rose more than 4.5% in the pre-market trading, indicating that investors have taken the results in their stride. Notably, the full-day trading session will depict a better picture.

Net interest income growth (driven by higher interest rates and loan growth), higher card income and rise in adjusted equity trading revenues (up 11%) supported the top line. Operating expenses also recorded a modest decline. Additionally, provision for credit losses decreased during the reported quarter.

As expected, bond trading revenues declined. Also, investment banking revenues recorded a fall as advisory fees and debt and equity issuance fees declined. Further, 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 $22.7 billion, which surpassed the Zacks Consensus Estimate of $22.2 billion. The reported figure was up 11% year over year. Excluding the impact of the tax act, revenues increased 6% to $21.4 billion.

Net interest income, on a fully taxable-equivalent basis, grew 6% year over year to $12.5 billion. Furthermore, net interest yield expanded 9 basis points (bps) to 2.48%.

Non-interest income increased 16% from the year-ago quarter to $10.4 billion. The rise was mainly due to higher card fees and trading account profits, partly offset by a fall in investment banking income.

Non-interest expenses were $13.1 billion, down 1% year over year.

Credit Quality Improves

Provision for credit losses decreased 10% on a year-over-year basis to $905 million. Also, as of Dec 31, 2018, ratio of non-performing assets ratio was 0.56%, down 17 bps. This was largely attributable to credit quality improvement in consumer loan portfolio.

Further, net charge-offs declined 25% from the year-ago quarter to $924 million.

Strong Capital Position

The company’s book value per share as of Dec 31, 2018, was $25.13 compared with $23.80 as of Dec 31, 2017. Tangible book value per share as of Dec 31, 2018, was $17.91, up from $16.96 a year ago.

At the end of December 2018, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.9%, up from 11.5% as of Dec 31, 2017.

Our Take

BofA’s efforts to realign its balance sheet and focus on core operations will likely support bottom-line growth. Also, the bank’s efforts to digitize operations and branch expansion plans are expected to support financials.

In addition, it is well poised to benefit from loan growth while flattening of yield curve remains a concern. Mortgage banking income continued to decline due to lower volumes and a fall in refinancing activity. Also, investment banking performance was disappointing. These are expected to have an adverse impact on the company’s revenues.

Bank of America Corporation Price, Consensus and EPS Surprise


Bank of America Corporation Price, Consensus and EPS Surprise | Bank of America Corporation Quote

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 Big Banks

Dismal fixed income trading and underwriting business performance affected JPMorgan’s JPM fourth-quarter 2018 earnings of $1.98 per share, which lagged the Zacks Consensus Estimate of $2.20.

Citigroup C delivered a positive earnings surprise of 3.9% in fourth-quarter 2018, backed by expense control and lower cost of credit. Adjusted net income per share of $1.61 for the quarter handily outpaced the Zacks Consensus Estimate of $1.55.

Backed by lower expenses, Wells Fargo WFC delivered a positive earnings surprise of 3.4% in fourth-quarter 2018. Earnings of $1.21 per share surpassed the Zacks Consensus Estimate of $1.17.

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