Bank of America’s Q3 earnings

On 10/14, Bank of America (BAC) reported strong Q3 EPS of $.85 ahead of estimates of $.71.  Highlights for the quarter were 12% revenue growth, declining expenses and ROTE of 15.8%. BAC’s earnings remain levered to rising interest rates – a 100 basis point increase in yields would increase earnings $7.2b or 8%. 

 

Current Price: $46.4                         Price Target: $50 (raised from $40)

Position Size:   2.62%                       Trailing 12-month Performance: 96%

 

Highlights:

  • Revenue growth of 12% to $22.8b
  • Deposits continued their strong growth – 15% YOY
  • Strong metrics for loan quality throughout pandemic. BAC had a loss ratio of 20 basis points the lowest in 50 years.
  • Over $26b of excess capital – returned $12b to shareholders in Q3.
  • Good expense control with noninterest expenses down 4% QOQ
  • Loan growth turned positive, growing 6% QOQ.  In prior quarters, loan growth was negative due to high levels of mortgage refinancing.
  • Net Interest Margin (NIM) rose to 1.93% from 1.83%, but remains depressed due to low interest rates. 

 

  • Deposits have grown 14% YOY
    • BAC ranked #1 in deposit share
    • Fiscal stimulus programs have supported consumers
    • BAC pays just .03% on deposits

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  • BAC has managed the pandemic well with strong credit performance.
    • Net charge-offs only 0.20% of loans, which is a 50-year low.  Last year this ratio peaked at 0.45%.  For comparison during 2010, the charge-off ratio peaked at 3.8% showing the relative severity of the Great Recession and the current strength of the U.S. banking system.
  • Excess capital
    • In Q2, BAC announce a $25b share repurchase program which is worth 7.5% of outstanding shares. 
    • Returned $11.6b to shareholders with $9.9b in share repurchases.  Dividend yield is 1.80% and shareholder yield is above 10%

BAC Thesis:

 

  • Over the years BAC has dramatically improved their Consumer Banking unit, leveraging technology and digital platforms which has improved margins and driven earning’s growth. 
  • BAC has a high-quality loan book which was seen during the pandemic as loan loss metrics were best among peers
  • BAC has strong earnings power, generating over $5b a quarter in earnings
  • BAC continues to generate excess capital which should lead to increased dividends and continued share buybacks
  • BAC’s earnings are sensitive to rate increases. 

 

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