Bank of America Corp (NYSE:BAC) managed to beat earnings estimates on Tuesday morning, but not by enough for BAC stock to avoid the past week’s downdraft in bank stocks.
For its fiscal second quarter, BofA earned $5.3 billion, or 46 cents per share, on revenue of $22.8 billion. That profit was up 11% year-over-year and beat official estimates of 43 cents, but they fell short of the “whisper number” of 48 cents.
Profit growth also fell short of the mark set last week by JPMorgan Chase & Co. (NYSE:JPM), where earnings grew 17%. And while the top line grew 7% and topped expectations of $21.8 billion, trading revenues actually declined by double digits.
As a result, BAC stock was off in premarket trading after falling in Monday’s trade, as well as the previous Friday.
Bank of America’s second-quarter earnings were not bad, they just weren’t great — a B+ instead of the expected A. Consumer banking earned $2 billion, with mobile banking rising 13%, and the investment bank earned $804 million, with total client balances now totaling $2.6 trillion.
CEO Brian Moynihan called it a strong quarter despite “modest economic growth of 2%,” saying the company plans to return $17 billion to shareholders over the next four quarters, raising the dividend one-quarter from the present 8 cents per share.
Low Interest Means Less Interest
The big bank stocks are becalmed because the rates they charge on loans aren’t rising as was expected. Inflation is still not hitting the Federal Reserve’s target of 2%, making it harder to lift interest rates.
Instead, the Fed is expected to start unwinding its $4 trillion balance sheet this fall, perhaps raising rates one more time in December, according to Bank of America’s head of global economics, Ethan Harris. The U.S. dollar has also been trending downward, and is now at a 10-month low.
As our Vince Martin wrote this week, BAC stock has been the best-performing bank share since last November, and he thinks the rally should continue. Shares earned a huge post-election bump, but since Jan. 1 are up less than 9%.
While mortgages had been the star during the Wells Fargo & Co (NYSE:WFC) heyday, and domestic banking has been lifting JPMorgan Chase, Bank of America’s bull case is based on global banking, with revenues of $5 billion and fees of $1.5 billion.
What it means is that U.S. growth is no longer the star of the global show, that more business is being done in Europe and Asia. BofA may still be well-positioned, but will have to prove its case with a more skeptical investing public.
Headwinds Increasing for BAC Stock
Warren Buffett famously put $5 billion into Bank of America preferred stock in 2011, getting dividends and common stock warrants that are now worth a combined $20 billion, but that was a deal on distressed assets ordinary investors would never make.
Bank of America is no longer a distressed asset. In fact, it may be fully priced.
There had been a great deal of optimism in the weeks before earnings, evidenced by a “whisper number” that was more than 10% ahead of the official estimate. The over-excited expectations were not met.
There has been an assumption that financial stocks are headed for a long bull ru, but if interest rates refuse to budge because inflation stays low, and if the dollar continues to weaken, assets held by the bank will be less attractive and the bull case could collapse.
My personal rule of thumb is not to jump into a stock when everyone is screaming “buy, buy, buy,” and that is what they have been saying about BAC stock in 2017.
The earnings stream may indeed be improving, but that improvement may already be fully priced into Bank of America.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
