Bank of America Q4 2020 earnings

On 1/11, Bank of America (BAC) reported core Q4 EPS of $.60 with positives of strong balance sheet and negatives of weakish results in capital markets. We believe BAC is managing the pandemic recession well, building excess capital and has strong earnings power. 

 

Current Price: $31.5                         Price Target: $36

Position Size:   2.76%                       Trailing 12-month Performance: -5.7%

 

 

Q3 Highlights:

  • Strong credit quality with credit loses reverting back to pre-pandemic levels and BAC released reserves for loan losses
    • BAC actually released $858m reserves built up in anticipation for pandemic related losses, showing confidence in the recovery.
    • Net charge-offs (loan losses) are back to pre-pandemic levels

    • BAC has managed the pandemic well with strong credit performance.
  • Largest deposit base in country with $885b in consumer deposits
      • Deposit growth has surged up over 23% yoy
      • Low cost source of funding.  BAC pay only 4 bips on deposits.

 

  • Net Interest income increased to $10.37b from $10.24b las quarter
    • Net interest margin leveled off at 1.71% which they believe is the bottom
    • Expect NIM to trend up as increased deposits are invested and balance sheet growth, though they noted reinvestment rates remain a headwind.
    • NIM will remain depressed until we see a sustained economic recovery.  At that point, banks will be among the industries most levered to benefit from the rebound.

 

  • Excess capital – BAC is a return of capital story
    • BAC has massive excess capital of $36B (13% of market cap) with a CET1 ratio of 11.9% which is 2.4% above required minimum
    • BAC has approved a $3.2b share buyback for this quarter 
    • Current dividend yield is 2.28% for shareholder yield close to 7%.
    • Fed’s stress test has consistently shown BAC losses to be lower than peers Strong capital ratios:
  • Attractive valuation
    • BAC has strong earnings power – generates over $5b a quarter in earnings
    • BAC continues to build capital as share buybacks and dividend increases are restricted. 

 

BAC Thesis:

 

  1. BAC has dramatically improved their Consumer Banking unit which has driven earning’s growth.  Loss metrics are best among peers.
  2. Despite current recession, BAC has strong balance sheet and earnings power
  1. Their stronger capital position should lead to increased dividends and buybacks

 

Please let me know if you have questions.

Thanks,

John

 

[category Equity Earnings]

[tag BAC]

$BAC.US

 

 

 

 

 

 

 

John R. Ingram CFA

Chief Investment Officer

Partner

 

Direct: 617.226.0021

Fax: 617.523.8118

 

Crestwood Advisors

One Liberty Square

Suite 500

Boston, MA 02109

www.crestwoodadvisors.com