It has been a roller coaster ride for Financials since the start of the year. But amidst the political turbulence, Bank of America Corp (NYSE:BAC) has managed to outperform its peer group albeit slightly. But excitement surrounding BAC stock has been muted of late, and for good reason.
Banks, which in the early part of the year, were outperforming the S&P 500, are now underperforming on a YTD basis by a couple percentage points. That includes BofA, whose 8% gains are more than 120 basis points below the S&P at the moment.
Against a backdrop of a low-volatility environment in which consumers and business alike with generally optimistic attitudes by historical measure, loan growth has been disappointing. This is at odds with the macro backdrop. The second quarter showed a healthy labor market and gains in non-farm payroll, and this should have translated to better numbers.
Why is BAC stock looking so sluggish?
Bank of America’s Loan Growth
Total average loans and leases were up just 2% year-over-year, and that growth was largely driven by the $2.9 billion partial impact from June 1 sale of non-U.S. consumer credit card business. That gain from sale distorts the growth number which otherwise would have been flat at best.
Drilling into average loans and leases in the business segment, year-over-year growth was better than 5%, and the overall commercial loan market hasn’t been off the charts as of late. Because we find ourselves in a persistently low-interest-rate environment, it’s critical that BAC actively grows its loan portfolio to drive earnings. It cannot just rely on higher rates to squeeze out a juicier spread.
With such a strong consumer banking franchise, I would’ve expected stronger second quarter numbers. Consumer banking growth was what supported the overall average total deposits growth for the quarter. Global Wealth & Investment Management’s contribution shrunk as did Global Banking and Other was flat. These are challenging times to show growth, indeed.
Within Consumer Banking, it was residential mortgages that drove loan growth. Home equity suffered a decline and everything else was pretty much flat. Here again, we have a glimmer of light in the darkness, but it doesn’t prove enough to drive meaningful growth across a behemoth of a company.
At Bank of America’s size it needs all divisions full steam ahead. BAC stock won’t soar on account of one or two divisions propping quarterly numbers up.
Returns and Risk Management
To be sure, one must give credit when due. Nonperforming loans and leases are down though, indicating better risk management. A year ago in Q2 2016, the percentage was at 1.49%; it declined to 1.18% in Q2 of this year.
BofA also has been consistent in improving returns. Return on average tangible common shareholders’ equity is up from 10.5% in Q2 2016 to 11.2% in Q2 2017. Dividend payouts are up as well, from 11.7% to 15.3%. Overall, earnings growth was stagnant throughout 2016, but this past quarter, diluted earnings jumped 12%.
It’s important to emphasize the focus on diluted earnings here given that in June, Series T preferred stock was converted into common stock. This Series T preferred stock was issued in 2011, with an exercise price of $7.142857 per share. As BAC writes:
“Upon exercise of the warrants, common shares outstanding will increase; however, there will be no effect on diluted earnings per share as this conversion has been previously included in the Corporation’s diluted earnings per share calculation.”
So, to fully account for the increase in shares, investors must look to the 46-cent-per-share profits rather than reported basic EPS of 49 cents.
Bottom Line on BAC Stock
There are some things that Bank of America is doing well at the moment, but results so far this year have not been overwhelming positive enough to inspire confidence. The stock has done slightly better than peers, but not as well as the major indices.
Stumbles by other competitors like Wells Fargo & Co (NYSE:WFC) may also have contributed to that slight outperformance rather than anything specific BAC itself accomplished.
I would be taking gains off the table.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
