By most measures, Bank of America (NYSE:BAC) shares should be moving higher right now. BAC stock’s third-quarter earnings as well as revenue were both better than expected, and both up on a year-over-year basis.
Nevertheless, BAC stock tumbled on Monday following the release of the Q3 report, and by more than a little. As of the most recent look, Bank of America stock was off by 2.5%, and testing the waters of even lower lows that would drag shares into price territory not seen since late last year.
Is it a buying opportunity, or a warning of what’s to come? Priced at only 9.6 times its forward-looking earnings — projections that likely underestimate how well B of A will actually do — the recent pullback in BAC stock would be deemed an entry point under any other circumstances. Right here and now, though, this may not be a knife worth trying to catch.
Bank of America Earnings Recap
For the quarter ending in September, Bank of America turned $22.8 billion worth of revenue into a per-share profit of 66 cents. Both figures compared favorably to the year-earlier numbers of $21.8 billion in sales and income of 46 cents per share of BAC stock. Perhaps more important, the top- and bottom-lines were both better than the $22.7 billion and 62 cents per share analysts had modeled.
CEO Brian Moynihan commented on the third-quarter results “Responsible growth, backed by a solid U.S. economy and a healthy U.S. consumer, combined to deliver the highest quarterly pre-tax earnings in our company’s history. This marks the 15th consecutive quarter of positive operating leverage, driven by continued growth in deposits, client balances in wealth management, solid loan growth and disciplined expense management.”
Total non-interest expenses fell from $13.4 billion in the same quarter a year earlier to $13.1 billion last quarter, which was also down from the second quarter’s $13.3 billion in non-interest expenses.
Moynihan announced his plan to cull more than $50 billion worth of expenses by the end of this year, and has largely achieved that goal. The cost-cutting appears to be slowing down now, out of necessity, but the impact has been significant. During the first three quarters of the year, dividends and buybacks of BAC stock have ultimately returned $19 billion back to shareholders.
What Went Right… and Wrong
Last quarter’s shining star was the company’s consumer banking arm. That division saw its operating profit grow 49% year-over-year, reaching $3.1 billion. Its consumer lending business was up 6% year-over-year, to $285 billion. Total deposits grew 5% to $1.35 trillion.
Rival Wells Fargo (NYSE:WFC), meanwhile, saw its deposits sink another 3% last quarter as it continues to grapple with its unauthorized account-opening debacle. Even removing Wells Fargo from the equation though, B of A has outpaced key competitors like Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM) so far this year in terms of new deposits.
Bank of America’s loan loss provisions are also healthier than other lenders’ earmarked losses. Bad loan provisions fell 14% from levels logged for the third quarter of 2017, to $716 million. Analysts were modeling credit loss provisions of $964.2 million.
The company has struggled on other fronts though. Namely, it’s investment-banking business has bumped into a headwind. Revenue for this division fell 5% last quarter, as the company lost even more ground than anticipated to rivals. Year-to-date, investment banking fees are down 11%.
Bottom Line for BAC Stock
The investment banking and markets-related division admittedly needs some help, particularly in light of the fact that former head of that business Christian Meissner will be stepping down by the end of the year. It’s a disruption Bank of America didn’t need just yet, even if CFO Paul Donofrio is confident about the division’s future. He said of the company’s investment banking arm “I know we can do better. I came from investment banking. I know they have built a great business, they have great bankers.”
With or without an impending recovery on that front though, it remains unclear whether BAC stock is well-positioned for a recovery in the immediate future. The bank is doing well anyway. Rather, the stock’s current weakness likely has more to do with a mostly miserable market environment right now, which hasn’t been kind to most stocks, but has been downright brutal to banking stocks.
The rout will end eventually, and BAC stock will be viewed as an undeniable bargain once it does. In the meantime though, the fact that most traders are seeing the glass as half-empty instead of half-full makes Bank of America a tough name to step into.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.