Bank of America (BAC) reported core Q2 EPS of $.67 above market expectations of $.65 due to solid expense control, better card income and capital market results. BAC continues to be levered to rising rates, improve the balance sheet and return capital to shareholders. BAC increased the dividend by 25% and plans to return $26b to shareholders via buybacks and dividends for a shareholder yield over 8%.
Current Price: $30.8 Price Target: $37 (Increased from $30 – 15x 2018E)
Position Size: 3.5% Trailing 12-month Performance: 25.5%
Q1 Highlights:
- Solid results, despite weak revenue growth
- Good control of noninterest expense -5% yoy
- Strong digital footprint
- Increased digital bank users to 35.7m from 30.8m a year ago
- 76% of deposits are conducted digitally
- Focused on returning capital to shareholders
- Continued improvement in the balance sheet
- Common equity tier 1 ratio 11.3% up from 7.8% in 2009 and above Fed’s target of 9.5% for BAC
- ROE of 10.8% with a return on tangible book of 15.2%
- Net charge offs 0.43%
- Net Interest income was increased 5% YoY
- Loan growth of 5% and deposit growth of 3%
- 100 bps increase in yield curve will increase net interest income by $3.2b over the next year, driven by sensitivity to short-term rates
- Strong growth in online banking with attractive offering for consumers – up 19% yoy.
- Continued strong expense controls
- Total headcount fell 1%
- Efficiency ratio improve 100 bps to 59%
- BAC is still attractively valued at 1.1x Book value and 14.2x P/E
- New target represents 1.5 times book value
- Expect the stock to grind higher given our view of accelerating EPS over the next 12-18 months driven by:
- BAC’s focus on balance sheet quality
- Declining expenses
- Positive leverage to rising rates
- BAC is focused on returning capital to shareholders increasing the dividend 25% and a shareholder yield over 8%
BAC Thesis:
· BAC has transformed its business to a higher quality mix
· Recent results demonstrate an accelerating EPS growth and returns over the next 2 years
· BAC has become a return of capital story
($BAC.US)
John R. Ingram CFA
Managing Director
Asset Allocation and Research
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
50 Federal Street, Suite 810
Boston, MA 02110