So it only took 10 years, but Bank of America Corporation (NYSE: BAC) is in the clear. It isn’t just the toxic mortgages I’m talking about, but the operation has ramped back up to very respectable metrics. Let’s take a look at the earnings report from a couple of weeks ago and see if BAC stock is worthy of consideration.
The metrics are frankly looking pretty darn good. BAC stock delivered record net income of $6.9 billion for the quarter, up 30%, although some of this had to do with the reduced tax rate corporations are now enjoying. But on a pretax basis, income was $8.4 billion, up 15%. This came on the back of a 4% increase in total revenue to $23.1 billion.
Just take a look at those numbers again. We’re talking about a company that will generate close to $30 billion in net income this year. Considering that it was writing off tens of billions of dollars in toxic mortgages at one point, this is a pretty incredible development.
A Closer Look at BAC stock
Net interest income grew 5% while non-interest income grew 3%. Not only that, noninterest expense fell 1%. That means Bank of America stock has now enjoyed 13 consecutive quarters of positive year-over-year operating leverage.
Remember, we want to see loans, deposits, and assets growing on a consistent basis. Average loans and leases for the business segment grew 5%, deposits increased 3%, and global assets under management grew 15%.
I like to keep a very close eye on charge-offs. Remember that when a lender is dealing with a loan that charges (say) 7% annually, if the lender writes off 70% of principal from a defaulted loan, it wipes out 10 interest-earning years worth of revenue. Every dollar written off, then, matters in a big way.
So it’s good to know that things are relatively stable in this arena. Total net charge-offs were $900 million, a huge decline from $1.2 billion in the previous quarter. The consumer charge-offs were $800 million, up from $700 million, driven by credit card defaults.
Now, the net charge-off ratio is still very low, at 0.75%. This number is perfectly reasonable, but it’s a number I’m always keeping a very careful eye on, as consumers continue to take on more and more debt.
More Bank of America Upside
The good news is commercial charge-offs dropped significantly, to only $100 million, a decrease of $400 million. Indeed, $300 million of that $400 million came from a single commercial entity in the fourth quarter.
The total allowance for loan and lease losses is $10.3 billion, which represents 1.1% of all loans and leases. This is also a perfectly reasonable number.
On the macro level, BAC stock has a lot of tailwinds. For starters, interest rates are rising. Bank of America will do better in a rising rate environment, because banks make more money on loans.
The gigantic corporate tax cut is also going to be great news for BAC stock. It literally means more money in the bank instead of going to the government. With the CFPB rightly under siege from its new pro–business director, I expect to see much less onerous regulation.
Regulatory burdens are particularly onerous on banks, and it leads to substantial additional costs when they are instituted. Hopefully, the CFPB will cut back on these regulations, which means less money will be wasted on them.
All in all Bank of America stock is looking very good these days. Given the overall macro trends and trends of the company level, I don’t know how you can go wrong here at $30 per share.
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 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
