Drip
Portfolio Report
NationsBank Earnings
by Dale Wettlaufer ([email protected])
Alexandria, VA (July 13, 1998) --Since NationsBank (NYSE: NB) is reporting earnings today, we'll kick off the big bank extravaganza with them. To get out of Jeff's way so he can get to something else that DRIPpy Fools not interested in financial services companies would like to see, I'll try to be brief but comprehensive with our wrap-up. What we want to do is review the financials, look at how the company is building value, and consider what the strategy is going forward. By the time you've got the basics down, it shouldn't be rocket science or require any overintellectualizing.
NationsBank this quarter showed the results of excellent operating synergies in its recent acquisitions. Little noticed by many, the Boatmen's Bancshares acquisition is now really hitting on all cylinders, as the company has taken its time to integrate the two companies well. Headquartered in Kansas City, Missouri, Boatmen's expanded NationsBank's reach across the Midwest in Missouri, Kansas, Iowa, Arkansas, and into New Mexico. The company's Model Banking program, which puts computers in branches and in operations on a common platform, allows the bank to increase sales to each customer and to serve them faster.
When NationsBank announced its merger with BankAmerica (NYSE: BAC) earlier this year, some Silicon Valley people expressed worries that NationsBank would have a huge Year 2000 conversion problem. In fact, NationsBank has less of a problem than banks of similar size, as the Model Bank program moved things to Y2K-compliant systems and as newer systems across the enterprise have much less of a leap to make than, say, Citicorp (NYSE: CCI), which uses lots of specially designed software. By the time the entire Y2K conversion process is done, NationsBank will have spent far less than half as much as Citicorp even though the two companies are roughly the same size (before the pending mergers).
On to the earnings from today. NationsBank grew net income (before goodwill amortization) per share by 20.5% in the quarter, from $1.07 per share in Q2 1997 to $1.29 per share this year. All of these numbers are presented, by the way, on a pro-forma basis, which assumes that the merger between Barnett and Nations was completed at this time last year. Earning assets grew 10.2% year-over-year and revenues grew at a much faster rate, at 14%. Noninterest income grew to 42% of revenues, which puts Nations at the upper end of superregional bank performance in this category and further characterizes its move to operating as a money center/universal bank with highly diversified revenue streams.
Return on assets and equity this quarter were both outstanding. Without pushing loan growth and leverage to the redline, return on assets came in at 1.45% (annualized) and return on equity was 18.3%. Looking into operating capital efficiency (scrubbing intangibles amortization out of expenses and goodwill out of assets), ROA for the quarter was a world-class 1.69% and return on tangible common equity rose to 35%. That's up from 30% last year. Not only did absolute ROE improve, but since leverage came down year-over-year, the company's risk-adjusted ROE also improved greatly.
Noninterest income was up strongly over last year, growing 30.6% as investment banking, brokerage, and trading revenues were all strong. The company's flat asset management performance is not something investors want to see, though. With a return on risk-adjusted tangible equity of 44% for the quarter, we'd really like to see results here. This is a segment of the business that doesn't suck down capital and produces excellent results from the capital that it does use. Of course, this is the case across the asset management industry (when done well). I wouldn't mind seeing Hugh McColl move in this direction in future acquisitions. While I don't want to be on-board with banks that shove proprietary mutual funds down customers' throats, I would want to be part of a company that can run a successful mutual fund and private bank very well. I wouldn't be surprised to see an acquisition along these lines within a year of closing the BankAmerica merger.
More on Nations and its earnings report tomorrow.
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