Most of the banks that have reported earnings so far have delivered better-than-expected earnings, and Bank of America (BAC 2.75%) was no exception. In addition to strong top- and bottom-line numbers, though, the bank delivered a strong all-around quarter without giving investors much to complain about. Here's a rundown of the numbers and why Bank of America still looks like an attractive investment at the current share price.
Bank of America beat most expectations
Bank of America beat estimates on both the top and bottom lines. The bank earned $0.46 per share for the second quarter, which is $0.03 more than analysts had been calling for. Perhaps more impressively, revenue came in more than a billion dollars ahead of expectations, at $22.83 billion versus estimates of $21.78 billion.
Image source: Bank of America.
In addition, the bank saw 7% fewer charge-offs than analysts had estimated, and although fixed-income trading revenue has been a weak spot among all of the major banks, Bank of America generated slightly more fixed-income revenue than analysts had been calling for.
Deposits grew by 4% year over year, and the bank's loan and lease portfolio grew by 5%. Additionally, the bank now has $2.6 trillion of wealth management client assets, and it saw inflows of $28 billion during the quarter.
One weak spot was net interest income, which came in at $11 billion and failed to meet analysts' $11.34 billion expectation. The bank's net interest yield of 2.34% actually dropped from 2.39% in the first quarter, which may have come as a surprise to many who expected it to rise. However, the bank did say that it remains positioned to increase net interest income as rates rise, and it said that a 100-basis-point increase in the interest rate yield curve could produce $3.2 billion more in NII.
Profitability and efficiency are much improved, but are not yet where they need to be
Since the financial crisis, Bank of America has been one of the cheapest bank stocks in the market, relative to its book value. One big reason for this is the bank's inability to produce profitability numbers that meet or exceed the industry benchmarks of a return on assets (ROA) of 1% and a return on equity (ROE) of 10%.
During the second quarter, Bank of America generated ROA and ROE of 0.93% and 7.3%, respectively -- still short of where it needs to be, but a significant improvement. The bank has been doing a great job of keeping expenses in line and improving efficiency, and if it continues to increase the efficiency of its operations, the magic 1% and 10% numbers could be within reach in the not-too-distant future.
|
Metric |
2Q17 |
1Q17 |
2Q16 |
|---|---|---|---|
|
ROA |
0.93% |
0.88% |
0.88% |
|
ROE |
8% |
7.3% |
7.4% |
|
Efficiency ratio |
60% |
67% |
63% |
Data source: Bank of America 2Q17 earnings presentation.
A leader in mobile and digital banking
It may come as a surprise to you, but in recent years, Bank of America has emerged as a leader in mobile and digital banking technology. During the second quarter, the bank was named No. 1 in online banking functionality and mobile banking functionality by Dynatrace and Forrester, respectively.
Image source: Bank of America.
The proof is in the numbers. Since 2014, the percentage of Bank of America's deposit transactions that are done through the mobile platform has grown from 10% to 21%. Digital sales have grown impressively as well.
Image source: Bank of America 2Q17 earnings presentation.
The widespread adoption of mobile and digital banking is a big driver of efficiency, as it costs the bank significantly less to process a mobile deposit than a paper in-person deposit, to name one example. As you can see in the graphic above, the bank has shed nearly 500 of its branches over the past three years, and it could continue to consolidate its physical operations if its mobile success continues.
The Foolish bottom line
Although Bank of America's stock price was nearly flat after the earnings announcement, I'm having a tough time finding anything seriously disappointing in the quarter. Sure, trading revenue could have been better, but this is a sector-wide issue, and Bank of America did better than expected. And I'd like to see rising interest rates translate into better margins and more net interest income.
Having said that, Bank of America surpassed nearly all of analysts' expectations for the quarter, improved its profitability and efficiency significantly, and continues to transition some of its business away from physical branches. In my mind, this was a fantastic quarter for Bank of America. And at a 4% discount to its book value of $24.88 per share, it still looks like a compelling value.
