Bank of America (BAC) stock looks ready to break out of an 18-month funk now that BAC has put the crushing weight of its legal and regulatory woes largely behind it.
Indeed, cost cuts and some easy year-ago comparisons helped BofA almost double its net income in the second quarter and beat Wall Street estimates by a wide margin.
With new efficiencies taking hold, perhaps a leaner bank — free from heavy legal and regulatory expenses — can put Bank of America stock on a stable growth path.
After all, BAC has been paying a steep price for its sins of the financial crisis throughout the recovery period, and that’s been a disaster for net income. Now that most of the issues have been settled, BAC is reaping the benefits.
Indeed, quarterly legal costs fell 95% to $175 million from $4 billion in the year-ago period. And BAC slashed other costs as well, making for a total year-over-year expense reduction of 25%. (BAC is letting employees go as customers increasingly turn to ATMs to do their banking.)
With interest rates sitting essentially at zero and revenue growth hard to come by, banks have been forced to rely on cost cutting to drive earnings growth.
No, that’s not sustainable over the long run, but as JPMorgan Chase (JPM) demonstrated in its own earnings report, it’s a strategy the market can live with. And JPM didn’t even post any revenue growth.
BAC Beats on Top Line, Too
BAC stocks rose sharply after the earnings news, and the big bottom-line beat undoubtedly did much of the heavy lifting. That said, BAC also reported surprise revenue growth — which eluded JPM and Wells Fargo (WFC) in the second quarter — and it even topped forecasts.
For the most recent three-month period, BAC said revenue rose 1.8% to $22.35 billion from $21.96 billion a year ago. Analysts had expected revenue to fall to $21.32 billion. That’s right: BofA exceeded the Street revenue forecast by more than a billion dollars.
The profit beat was even bigger. Earnings rose to $5.32 billion, or 45 cents a share, from $2.29 billion, or 19 cents a share, a year ago. (As noted above, last year’s Q2 included $4 billion in legal costs.)
The bottom line, however, is that analysts, on average, expected earnings of just 36 cents a share, according to a survey from Thomson Reuters.
After having spent more than $70 billion in fines and settlements related to the financial crisis, BAC has finally put that extended nightmare to bed. Like the rest of the industry, it will need to keep figuring out ways to cut costs, because revenue growth might not be possible in the quarters ahead.
And that should be sufficient for the market to change its attitude on BAC stock. Shares trade at a price-to-book value of less than 0.8. That made sense when the bank was reeling under the weight of legal action and other debacles. But now?
Even Citigroup (C) gets more respect from the market when it comes to valuation by P/B.
Bank of America stock is by no means a steal at current levels. It’s still walking with a noticeable limp. But its biggest problems now are the same ones plaguing JPM, WFC and the rest of the banks.
Surely, at least a little multiple expansion — to close the gap between the best banks and BAC — is in order.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
