The third quarter results are in for Bank of America Corp (NYSE:BAC), and they were good. Better still, BAC stock responded bullishly to the news (reversing a pre-reveal lull), moving to new multi-year highs in the process. The big bank is doing almost everything it’s supposed to be doing.
Not everything about the third quarter BAC earnings report was downright awesome though. While progress was being made by most measures, there are a handful of things that ended up being less than ideal. Current and would-be owners of BofA stock, and those who are counting on the BAC dividend to grow going forward, may want to keep close tabs on these potential tripwires for the foreseeable future.
In no particular order…
Commercial Loan Charge-Offs Are Rising
It’s not entirely surprising, although the degree to which charge-offs grew was perhaps a bit higher than anticipated. The tally of $169 million was the highest figure in over a year, and not just because the loan portfolio is getting bigger. The charge-off/portfolio ratio grew from 0.1% in the third quarter a year earlier to 0.14% this time around, extending an uptrend.
The good news is, the provision earmarked in the third quarter was lower on a sequential and a year-over-year basis. The number of nonperforming loans and leases fell as well. This may be a vulnerability (albeit a small one) for BAC though, as a fair amount of these are small business lines. If economic growth doesn’t reach escape velocity, these charge-offs could end up being more of a drag than presently expected as small companies flounder.
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Wealth & Investment Management Revenue Is Sagging
Like commercial loan charge-offs, it wasn’t entirely surprising to learn Bank of America’s trading and brokerage business waned last quarter. Investors are gun-shy about doing much of anything, not entirely sure there’s room for the market to keep running and not entirely certain if President Trump’s tax code and healthcare agendas will ever get traction.
Unlike the company’s commercial loan arm though, BofA’s wealth management and trading arm is a major component of its revenue mix. It also is a significant piece of the bottom line. That’s why it was concerning to see it fall from $4.7 billion to $4.6 billion sequentially, even if it was up from Q3-2016’s total.
Net interest income was the weakest link, sliding lower from Q2’s pace. That in itself wouldn’t be so alarming were it not for the data that’s not represented on the visualization above. That is, total customer deposits held with Bank of America’s wealth management division fell to a five-quarter low of $240 billion. Some clients are leaving the company altogether.
Investment Banking Business is Slow
Last but not least, the one final thing BAC stock holders will want to keep an eye on until further notice is its investment banking business. This unit of its Global Banking division saw a 1% increase in revenue year-over-year, but the third quarter was the second quarter in a row this unit saw a shrinking top line. Debt-deal revenue grow, but its advice and equity-deals business tapered off quite a bit, mirroring the worldwide slowdown in deal-making we’ve seen in just the past few months.
Some suspect that the tepid post-IPO response to Snap Inc (NYSE:SNAP) and Blue Apron Holdings Inc (NYSE:APRN) may have kept a lid on new issues, while all the worthy mergers may already be in the books. Whatever the case, the status quo isn’t exactly an exciting one for BofA’s investment banking business unless companies are interested in taking on debt.
Bottom Line for BAC Stock
Don’t read too much into the assessment. Though some problems were highlighted here, they were only highlighted for logistical reasons. Bank of America has far more working for it than against it, and the BAC dividend is fine. Indeed, it’s still (in this reporter’s opinion anyway) the best bank stock you could own right now.
It’s not infallible though, and the three items discussed above are the three biggest vulnerabilities, as they’re the ones that have the most potential to nag at other BAC stock owners. You’ll want to keep your finger on the pulse of how traders feel about those weak points, even if you’re as much of a bull as I am on BofA.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
