With Bank of America Corporation (NYSE:BAC) delivering an impressive quarter a few days ago, a deeper analysis shows that tailwinds are picking up for BAC stock. Bank of America struggled for quite some time after the mortgage crisis. There were $35 billion dollars paid out in settlements, which undermined the foundational improvement in the bank. However, patient investors are starting to see benefits and I think more are on the way.
BAC stock put up only a 1% increase in revenues in Q3, to $21.8 billion. However, there is a flaky number that all banks report, which is called “pre-provision operating profit”, which is the profit before loan loss provisions. The problem in making QTQ and YOY comparisons, is that this number includes trading gains and losses. Those can swing wildly from quarter to quarter.
If we remove the trading gains, BAC is doing exceptionally well in regard to net interest income, which was up 10% to just over $11 billion. Behind this gain was a 13bps net interest margin increase, lifting the total margin to 236bps. It’s these margins that will be the story of the future for BAC stock price.
BAC Stock ups and Downs
Non-interest income (NII) was where BAC struggled, with about an 8% decline. This, in turn, was offset by a 2.5% cut in expenses. The expense side of the equation will also be important going forward.
In the end, BAC stock delivered $0.48 per share in earnings, close to $5.1 billion. Mind you, even net income was clocked to the tune of $500 million because Warren Buffett finally converted his preferred shares that he bought when BAC was in big trouble.
Finally, with any bank, we want to see expanding deposit volume. The more deposits there are, the more money the bank can lend out, and the more profit it can generate. Indeed, in Q3, deposit volumes were up 4.4%.
What’s interesting is that the loan-to-deposit ratio, which measures how much money gets lent per dollar deposited, has declined since 2014. It fell from about 80% to 70%. That means BAC stock has been consolidating deposits and being more coy in its underwriting.
This takes us back to net interest margin, mentioned above. BAC appears to be very patient in regards to opening up the loan spigot. The NII increase of 10% is impressive on its own. Should there be significant and consistent economic improvement, as reflected in GDP, that should drive demand and allow BAC to go after higher quality loans.
The Bottom Line on BAC Stock
Overall, then, I like what I’m seeing in net interest income growth and deposit volume growth.
Meanwhile, the improving situation at BAC led to a massive increase in the dividend, which is now back to $0.48 per share, or 1.73%. It’s still below its $0.64 per share dividend prior to the mortgage crisis, but the increase at least puts BAC stock back on the radar for dividend investors.
I am normally not a fan of stock repurchases. I find most companies overpay for shares that often are far too expensive to spend capital on, especially if they use debt to do so. BAC is one exception. The reason is that, in order to survive the crisis, the bank had to issue tons of new shares and diluted the stock by about 50%. So, that the company spent $7.9 billion in the first three quarters to buy back stock doesn’t strike me as unreasonable.
I think BAC stock has more potential for capital gains than for dividend yield, yet I think you might be well-served hunting around for other banks that offer a greater balance of the two.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
