Bank of America (BAC) reported Q2 EPS of $.37 was ahead of estimates, but earnings were down 50% year over year. Earnings were dented by a $5.1b provision for loan losses. Interested income fell due to lower interest rates. We believe BAC is managing the pandemic recession well, has a strong balance sheet and earnings power remains intact.
Call highlights: “Baseline projection now extend the length of the recession environment into 2022, deep into 2022” Brian Moynihan CEO
Current Price: $ 23.9 Price Target: $30 (decreased from $39)
Position Size: 2.3% Trailing 12-month Performance: -15.9%
Q2 Highlights:
- $5.1 Provision for loan losses
- This quarter is the second quarter since a new accounting rule for reserves was implemented which allows banks to estimate future losses and build reserves based on an estimate. Reserve builds today are forward looking and hence much higher than those in 2009 due to the accounting change.
- Increased provision to $21b doubled from end of year. Reserves are 2% of total loans.
- Not a normal recession: Due to massive government support, losses are not as high as 11% unemployment rate would indicate. Additional government support for wages is important for all banks.
- Net Interest income decreased from $3.8b to $3.5b
- Lead by consumer, deposits increased 8% most of which was invested at the Fed at lower rates
- Net interest margin fell to 1.87%
- Strong balance sheet
- Nonperforming loans are lowest among peers
- Fed’s stress test has consistently shown BAC losses to be lower than peers
- Strong capital ratios: CET1 ratio of 11.4% which is 1.9% above required minimum
- BAC is selling at a discount to book value! at 0.9x Book value and 12.8x P/E
- Though not mentioned on the call or in their presentation, BAC repurchased 1% of their outstanding shares for $5b last quarter. Dividend yield is 3.0%. Total shareholder yield is ~10%!
BAC Thesis:
· BAC has dramatically improved their Consumer Banking unit which has driven earning’s growth. Loss metrics are best among peers.
· Despite current recession, BAC has strong balance sheet and earnings power
· 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