Bank of America (BAC) Q3 EPS of $.48 was above market expectations ($.46) due to solid expense control, modest loan growth and increase in net interest margin. BAC continues to be levered to rising rates, improve the balance sheet and return capital to shareholders.
Current Price: $26.24 Price Target: $30 (Increased from $25)
Position Size: 3.1% Trailing 12-month Performance: 58.7%
Q1 Highlights:
• Continued improvement in the balance sheet
o Common equity tier 1 ratio 11.3% up from 7.8% in 2009 and above Fed’s target of 9.5% for BAC
o ROE of 8.1% with a return on tangible book of 11.3%
o Net charge offs 0.39% down YoY
• Net Interest income was increased 5% YoY
o Loan growth of 2% and deposit growth of 4%
o 100 bps increase in yield curve will increase net interest income by $3.2b over the next year, driven by sensitivity to short-term rates
o Strong growth in online banking with attractive offering for consumers – up 19% yoy.
• Continued strong expense controls
o Total headcount fell 1%
o Efficiency ratio improve 200 bps to 60%
• BAC is still attractively valued at 1.1x Book value and 14.2x P/E
o New target represents 1.2 times book value
o Expect the stock to grind higher given our view of accelerating EPS over the next 12-18 months driven by:
BAC’s focus on balance sheet quality
Declining expenses
Positive leverage to rising rates
• BAC is focused on returning capital to shareholders repurchasing $7.9b in stock and $2.8b in dividends year to date which totals a 5% shareholder yield
BAC Thesis:
• BAC has transformed its business to a higher quality mix of businesses that is not reflected in the current valuation – trading below book value
• Recent results demonstrate a fundamental inflection point in BAC’s business that we believe will drive accelerating EPS growth and returns over the next 2 years
• Improving earnings will drive a stronger capital position which should lead to increased dividends and buybacks
($BAC.US)