Bank of America (NYSE:BAC) was one of the hardest-hit major U.S. banks during the financial crisis, and the stock took a major tumble as a result. However, the bank has done an incredible job of not only recovering from the meltdown, but transforming its business into a well-run, sustainable banking operation that continues to improve.
As a result, Bank of America's stock price has risen more than 600% altogether since its 2009 post-crisis lows, and 2017 has been a very strong year, with a gain of 22% through mid-November. Here's why the bank is doing so well, and why shareholders should be encouraged about the future.
Solid growth throughout the business
The most obvious way to see that Bank of America has done well in 2017 is to simply look at its growth. Through the first nine months of 2017, net income has risen by 19%, and earnings per share for the most recent quarter grew by 17% year over year. There has also been solid growth in deposits and in the loan portfolio, and the bank's wealth-management business is seeing positive inflows.
Net interest yield, which tends to expand during rising-rate periods, has grown by 13 basis points, and stands to widen even more if the Federal Reserve continues to increase rates as expected.
Growth + Cost reductions = Higher profits
Growth is nice to have, but if your expenses rise just as quickly, it won't translate into higher profits. Bank of America's management has prioritized efficiency for this very reason. In fact, even though revenue has only grown slightly (about 1%) over the past year, noninterest expense is down 3%. Combine this with higher interest margins, and you'll uncover the reason why Bank of America's net income has soared, even without much more revenue.
The bank has done an excellent job of reducing its physical footprint and embracing lower-cost mobile and online banking technologies. There are now 436 fewer branches than there were three years ago, including a reduction of 118 in the past year alone. On the other hand, Bank of America in 2017 has 23.6 million active mobile-banking users, 67% annual growth in person-to-person transaction volume, and more than one-fifth of all Bank of America deposit transactions now originate through the mobile app.
Because of these efforts, Bank of America's efficiency ratio has fallen to 60%, a respectable level for a major bank, and its return on equity (ROE) and return on assets (ROA) are getting closer and closer to the industry benchmarks of 10% and 1%, respectively, for the first time in years.
Continuous improvement in risk management
Since the end of the financial crisis, Bank of America has done an excellent job of strengthening its balance sheet and reducing its risk levels. The bank's deposit base has grown by 27%, and long-term debt has been reduced by 57%.
And instead of simply focusing on growing the business as much as possible, the focus has shifted to pursuing lower-risk customers -- even if it leaves potential revenue on the table. For example, the bank's outstanding credit card loans have actually declined by more than a third since 2008, but the charge-off rate is roughly one-fifth of what it was in the aftermath of the crisis. The same can be said about home equity loan originations.
In 2017, the situation continues to improve. The bank's charge-off ratio continues to fall, as do the number of non-performing loans. Consumer net charge-offs have fallen from 0.69% of assets a year ago to 0.65% currently, while nonperforming loans and leases are down by approximately $1.1 billion from a year ago.
Massive capital return to shareholders
Through the first nine months of 2017, Bank of America has returned $10.7 billion to shareholders in the form of buybacks and dividends. In fact, the company's dividend has grown significantly faster than many experts had projected just a few years ago.
To illustrate this, consider that Warren Buffett held warrants to buy 700 million shares of Bank of America with a 2021 expiration date, and had said several times that he would most likely exercise them just before expiration. Well, Bank of America's rapid dividend increases of the past of couple years caused the Oracle of Omaha to change his tune, which is why Berkshire Hathaway is now the bank's largest shareholder.
Although the dividend increases have been impressive considering the shape Bank of America was in just a few years ago, buybacks are the big priority. In fact, the $12 billion buyback authorized by the bank earlier this year is more than twice the previous amount.
Here's the bottom line: The fact that Bank of America has been permitted by regulators to accelerate its capital return so quickly is an excellent indication that the bank has been crushing it in recent years, and continues to do so in 2017.