Bank of America Corp (NYSE:BAC) shareholders had good reason to expect a great first-quarter earnings report from BofA on Tuesday morning. Especially in the shadow of impressive Q1 results from Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM). While BAC stock reversed after opening higher on Tuesday, the results surely couldn’t have disappointed.
Indeed, BAC shareholders would be hard pressed to find anything wrong with the numbers at all.
Revenue was up, income was up and results were better than expected across the board.
Perhaps most important of all, BAC stock was firmly up on Tuesday morning, tacking on more gains following Monday’s sizeable advance.
If there was any doubt Bank of America is (finally) back on track, it was wiped away today.
Bank of America Q1 Earnings
A quick look at the headline numbers for the quarter ending in March:
- Bank of America earned 41 cents per share versus expectations of only 35 cents per share. That figure was 46% better year-over-year.
- Revenue of $22.2 billion grew 12.5% YOY and topped estimates of $21.6 billion.
Picking a highlight isn’t easy, in that all facets showed tremendous progress. Its consumer loan portfolio grew by $18 billion, while brokerage assets were up 21% on a year-over-year basis. Its wealth and investment management assets grew by $29 billion in new-asset inflow, and net interest income was up 5% thanks to rising interest rates.
Better still, noninterest income — fee-based and stock/bond trading — grew 9% from Q1 2016’s levels, mirroring though topping Q1 trading revenue for JPMorgan and Citi.
CEO Brian Moynihan commented on the numbers:
“Our approach to responsible growth delivered strong results again this quarter. Consumer spending was up, our wealth management business had strong asset management flows, investment banking fees rebounded nicely, and we continued to provide credit and capital to our corporate and institutional clients to help them drive the economy forward.”
That’s only half the good news.
Bank of America Passes Muster on an Even Deeper Look
While the most-watched measures of interest to current and prospective BAC shareholders were rock-solid, the more obscure (though arguably more important) figures of internal health were just as impressive.
More so than most other major banks, Bank of America struggled to find its way out of the mess left behind by the 2008 subprime loan meltdown. BofA did poorly on a couple of the Federal Reserve’s so-called “stress tests,” and as such was limited in terms of how much of a dividend it could dish out, in turn upping the size and quality of the capital base it was required to build.
The matter seems to be firmly in the past for the bank now.
BofA’s return on average common equity was 7.3%, and its return on average tangible common equity rolled in at 10.3%. That’s a hair above Goldman Sachs’ ROTCE target of 10% for BAC. While the figure is still shy of the company’s aggressive ROTCE goal of 12%, Q1’s score showed progress from Q4’s ROTCE reading of 9.9%.
Simultaneously, net charge-offs on bad loans fell from $1.1 billion to only $934 million year-over-year, while the provision for future credit losses fell from $997 million to $835 million.
All banks end up making loans that eventually go bad; that’s just the cost of doing business. Those costs swelled after 2008’s marketwide subprime loan impasse, and just when it appeared heavy loan losses were in the past, an implosion in crude oil prices meant many of BofA’s loans to the energy sector also soured. BAC is starting to see daybreak on that front too, however.
That said, Q1’s charge-offs and loss provisions were up slightly from Q4’s totals, though the rise can be attributive to seasonality.
Most compelling of all: The company gave $2.3 billion back to BAC shareholders in the form of stock buybacks, in addition to the $800 million it paid in dividends. Bank of America stock currently yields 1.34%, most recently paying 7.5 cents per share at the beginning of March. All told, BofA gave 70% of last quarter’s income back to its investors.
Bottom Line on BAC Stock
Bank of America didn’t provide updated guidance for Q2 or for the full year in its presentation, though the matter may come up during the earnings call (scheduled for 8:30 a.m. Tuesday).
As of the latest look, though, analysts expect BofA to report a profit of 46 cents per share on $22.16 billion for the quarter currently underway. Both would be well up from year-ago levels. On a full-year basis, the market is looking for a profit of $1.75 per share on revenue of $88.44 billion. Those figures are up 16.6% and 4.5%, respectively, on a year-over-year basis.
I wouldn’t be surprised to see those estimates revised upward in light of the Q1 report.
By that same token, don’t be surprised if analysts start upgrading BAC stock from their current consensus opinion of slightly less than a mere “buy” (with the top score being a “strong buy.”) The analyst community tends to be bullishly biased, so anything less than a full buy rating suggests Bank of America isn’t getting the respect its first -quarter results say is merited.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.