It has been about a month since the last earnings report for Bank of America (BAC - Free Report) . Shares have lost about 2.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Bank of America due for a breakout? 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 Beats Q4 Earnings & Revenue Estimates, Costs Down
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 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).
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.
The company expects NII to be negatively impacted by roughly $200 million for two less days, on a sequential basis.
Net interest yield is likely to edge up slightly, driven by loan growth funded by low-cost deposits.
Expenses are expected to include nearly $500 million related to seasonally elevated personnel costs.
NII growth is expected to continue on the back of loan and deposit growth, even in unchanged rate environment.
Total loan growth is anticipated to be in the low-single digits.
Expenses are projected to be near 2018 level. This includes nearly $1 billion for increased spending in the aggregate in several areas.
Net charge-offs (NCOs) are expected to remain approximately $1 billion. Further, provisions are expected to roughly match NCOs in sync with loan growth.
The effective tax rate (in absence of unusual items) is expected to be roughly 19%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, Bank of America has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was 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.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Bank of America has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.