A month has gone by since the last earnings report for Bank of America (BAC). Shares have added about 0.6% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Bank of America 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 Q4 Earnings Beats on Trading, Underwriting & Loans
Improved trading and underwriting performance drove Bank of America’s fourth-quarter 2019 earnings of 74 cents per share, which surpassed the Zacks Consensus Estimate of 68 cents. Also, the figure was up 6% from the prior-year quarter.
As expected, BofA came out with improved trading and investment banking numbers. Sales and trading revenues (excluding DVA) grew 13%, driven by 25% rise in fixed income trading, while equity trading income witnessed a fall of 4% on year-over-year basis.
Investment banking fees grew 9% as underwriting fees recorded a rise. Equity underwriting income and debt underwriting fees grew 18% and 14%, respectively. On the other hand, advisory fees fell 5%.
Also, net interest income decreased despite decent loan growth. Moreover, the company’s operating expenses rose moderately. Further, provision for credit losses increased during the reported quarter.
Performance of the company’s business segments, in terms of net income generation, was not impressive as well. All segments, except Global Markets and All Others, witnessed a fall in net income. Overall, net income declined 4% to $7 billion.
Loan Growth, Fee Income Aid Revenues; Expenses Up
Net revenues amounted to $22.3 billion, which marginally beat the Zacks Consensus Estimate of $22 billion. However, the reported figure was down 1% on a year-over-year basis.
Net interest income, on a fully taxable-equivalent basis, declined 3% year over year to $12.3 billion, mainly due to lower interest rates, partly offset by loan and deposit growth. Also, net interest yield was down 17 basis points (bps) to 2.35%.
Non-interest income grew marginally from the year-ago quarter to $10.2 billion.
Non-interest expenses were $13.2 billion, up 1% mainly due to continued investments in franchise.
Efficiency ratio was 59.24%, up from 57.65% in the year-ago quarter. Increase in efficiency ratio indicates deterioration in profitability.
Credit Quality: Mixed Bag
Provision for credit losses increased 4% on a year-over-year basis to $941 million. Also, net charge-offs rose 4% to $959 million.
However, as of Dec 31, 2019, ratio of non-performing assets ratio was 0.39%, down 17 bps.
Strong Capital Position
The company’s book value per share as of Dec 31, 2019, was $27.32 compared with $25.13 on Dec 31, 2018. Tangible book value per share as of the fourth-quarter end was $19.41, up from $17.91 a year ago.
At the end of December 2019, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.5%, down from 11.9% as of Dec 31, 2018.
Management expects stable economy and interest rate environment in 2020. Thus, based on these assumptions, the company has provided guidance.
For first-quarter 2020, NII is expected to decline sequentially as one less day of interest, full impact of October 2019-end interest rate cut and dilution in securities yields will be partially offset by modest loan and deposit growth.
For second-quarter 2020, NII is anticipated to fall again on a sequential basis due to seasonality. For the second half of the year, the company projects NII to rise modestly, driven by an additional day of interest, deposit pricing discipline, and continued loan and deposit growth.
Thus, for 2020, NII is expected to modestly down year over year.
Management expects loan growth in business segments to be in the mid-single digit range, with solid growth likely in consumer loan portfolio and commercial loan growth likely to be modest.
Now coming to expenses, management expects operating expenses for 2020 to be in the low $53 billion range. Also, for the first quarter, expenses will include nearly $400 million of seasonally elevated personnel costs related to payroll taxes, while for the remaining three quarters expenses are expected to be in the low $13 billion range.
Additionally, effective third-quarter 2020, the accounting for the Bank of America Merchant Services joint venture (JV) is expected to change, following its dissolution. At that time, the company will separately record revenues and expenses from merchant servicing operations, rather than reflecting its share of JV earnings. This will result in an increase in both expenses and revenues, with little bottom-line impact. The company intends to provide more guidance later on.
Further, the company is likely to spend approximately $3 billion in technology upgrades.
Now on to asset quality, the company expects provisions to be slightly higher than net charge-off in 2020. Additionally, the bank provided some perspectives related to the CECL. The day one implementation resulted in a $3.3 billion rise in allowance, which was in line with the last update the company provided. All else equal, this is anticipated to lower common equity tier 1 (CET1) ratio by almost 20 basis points.
The effective tax rate (in absence of unusual items) is expected to be roughly 18% for 2020.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month.
At this time, Bank of America has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Bank of America has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.