Just like its rivals, Bank of America Corp (NYSE:BAC) beat Wall Street’s quarterly estimates thanks to a rebound in bond trading and investment banking, and that sets up BAC stock for a strong run into year-end.
Analysts were expecting a strong quarter out of BofA, and the money center bank delivered in a big way. But it wasn’t just the broader industry-wide rebound in critical ares like fixed income, currencies and commodities (FICC). Bank of America also made some of its own luck through further cost cuts.
The bottom line is that the bank topped analysts’ average estimates on both profits and sales.
For the most recent quarter, Bank of America earnings came to $4.96 billion, or 41 cents a share. That’s up from $4.62 billion, or 38 cents a share, in the same quarter last year. Analysts polled by Thomson Reuters were looking for earnings of 34 cents a share.
That’s a big earnings beat.
Revenue increased rose 3.1% to $21.64 billion vs. a Street forecast for $20.97 billion. At the same time, expenses fell 3.3%, which magnified the effect of higher revenue on profits.
And remember, like all banks, all this comes despite near-record low interest rates that continue to squeeze net interest margins. That’s the difference between what a bank pays for deposits and charges for loans.
BAC Hits on Most Cylinders
The big breakout came courtesy of FICC, which finally bounced back for all banks last quarter after years of lackluster results. Trading revenue in those especially lucrative assets classes increased almost 40% to $2.77 billion, thanks to strength in mortgage bonds and other credit products.
Advances in FICC helped offset further declines in equities trading, which slipped 17% to $960 million. Taken together, on an adjusted basis, all trading revenue rose 18% to $3.73 billion from $3.16 billion a year ago.
As welcome as those gains may be, cost cuts remain a central part of the bank’s strategy. Once again, it delivered there, too. BAC cut expenses to $13.48 billion year-over-year after closing 100 branches and slashing employment by 6,000. Sadly, BofA employees can expect more pain ahead. Over the summer, the company said it will pare another $5 billion in expenses by 2018.
The latest results should go a long way to winning over investors who remain skeptical about Bank of America stock’s prospects. Shares are still down about 5% for the year-to-date, but they’ve been in a powerful uptrend since mid-summer. Indeed, BAC is up more than 30% since late June.
Bottom Line for Bank of America Stock
It’s starting to dawn on the market that there really is value to be had in Bank of America stock. The firm is making strong progress on the top and bottom lines and has more cost cuts to go. At the same time, shares look cheap. Even after the recent run, BAC stock has a price-to-book multiple of just 0.68.
That was justifiable when the bank was laid low and the future was very much in doubt — but not any more.
At some point, the market is going to recognize the real progress BAC has made over the last few years. By then, however, it will be too late to catch much of the upside in shares.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
