There are mostly tailwinds for Bank of America Corp (NYSE:BAC), based on the recent earnings report for BAC stock and overall macroeconomic conditions. That’s good news for investors and may even offer entry points for those lacking a large bank in their portfolio. There are few headwinds that I see, but nothing that screams to me to sell BAC at this time.
BAC stock had a pretty solid earnings report. Revenue rose 7.3% to $22.8 billion, which beat estimates by 5%. A tight fist on expenses also lifted the bottom line from $4.8 billion to $5.3 billion. I’m never keen on companies improving net income through expense cuts because those can’t be duplicated. It isn’t growth. Still, for a bank as large as Bank of America, the top line increase can’t be ignored.
Interest Income at BofA
We always love net interest income at banks because that’s their bread and butter. Are they growing their loan books — using proper underwriting — to increase interest payments? That’s what BofA did, growing loans from $903 billion to $917 billion.
There’s also great news on the credit loss front. Net charge offs improved, by falling 8% to $908 million from $985 million. That’s a charge off ratio of 0.4%, down from 0.44%.
Still, non-interest income also did extremely well – up 6% to $11.8 billion. I very much like that these two income avenues are split evenly. Finally, banks have something called an “efficiency ratio”. It’s a bit like return on equity. It tells us how well is BAC stock doing at spending its money in order to make money. The efficiency ratio was in the high-70% range at one point. Today, it’s down to 60%. That’s an incredible improvement.
The Macroeconomic Situation
I just found out that Millenials are now larger in number than baby-boomers. So while the latter group offers headwinds for the senior nursing facility sector, the former is great news for both the apartment and housing sectors. In theory, this demographic is going to get jobs, rent apartments, and eventually start buying homes. I do have some skepticism, in that the economy is moving more into part-time gigs from a structural standpoint, but the evidence isn’t in yet to firm up that conclusion.
Also, if one is to presume that GDP will improve under this allegedly pro-business President, that can only help BAC stock. Better economy means business growth, which means more capital needed to grow, which means more loans.
Also, one hopes that the CFPB and Dodd-Frank will be reformed so as to reduce regulatory expenses. That has been a huge burden on banks, and the regulatory structure is such that it prohibits certain types of business being done. We just learned the other day that the onerous Operation Choke Point appears to be ending. This was an insidious Obama-era attack on free enterprise, where the DOJ was telling banks to cut off doing business with certain industries the Administration simply didn’t like.
Bottom Line for Bank of America
We also have interest rates rising. Some people mistakenly think this is a bad thing for banks. In fact, it is great. It increases borrowing costs for banks, which is bad. However, for any floating rate loans, the bank can raise rates on those loans.
What don’t I like? Did you see how BofA has almost a trillion dollars in loans outstanding? A TRILLION DOLLARS. Now, think about all the other large banks. Global consumers are living on credit. The global economy is driven by credit. Heck, that BAC stock had to write off a billion dollars in one quarter alone – think about that.
The long-term worry, and it would hit banks first and then the rest of the market, is what happens when people can’t make good on trillions in credit.