Bank of America (NYSE:BAC) reported fourth-quarter earnings that beat expectations on the bottom line, posting adjusted earnings of $0.47 per share versus analyst estimates of $0.44. However, the bank's revenue slightly missed, at $21.4 billion versus expectations of $21.531 billion.
That said, there's a lot more to the story than just the headline numbers, and this is especially true for Bank of America. Here are eight things that investors should know in order to effectively interpret Bank of America's most recent results.
1. Solid growth in most areas
The bank's solid results were fueled by a nice increase in deposits and loans. The bank's deposit base grew by 3% year over year, including impressive 8% growth in consumer deposits. Bank of America's consumer deposits should allow it to benefit from rising interest rates more than most, as their cost (interest paid) on consumer deposits is just 0.04% -- practically nothing.
Even though mortgage and home equity loans declined by about 20%, the overall loan portfolio grew by 2% on particularly strong growth in consumer lending, such as credit cards and auto loans.
2. Don't worry about the tax reform impact to 2017's earnings
Thanks to the Tax Cuts and Jobs Act, the bank took a one-time $2.9 billion charge in the fourth quarter. I explained why most banks initially took a hit in a recent article, but in a nutshell, Bank of America and most of its peers carry deferred tax assets on its balance sheet, which immediately became less valuable when the corporate tax rate fell.
However, it's important to emphasize that this was a one-time expense, and the long-term benefits are likely to outweigh the bad. Bank of America generally operates at an effective tax ratio greater than 30%, so the new 21% corporate tax rate could boost earnings for years to come.
3. One big charge-off skewed the numbers
Even if you exclude the impact of tax reform, Bank of America's fourth-quarter return on assets (ROA) and return on equity (ROE) of 0.90% and 7.8%, respectively, might seem a bit of a step backwards. However, there's one other one-time item that weighed down profits.
In addition to the tax reform impact, there's one more thing that skewed Bank of America's results for the quarter -- a "single-name non-U.S. charge-off" of about $300 million, which made up the bulk of the $327 million increase in net charge-offs for the quarter.
4. Interest margin is expanding
As expected, Bank of America's net interest yield (its profit margin on loans) grew during the fourth quarter and for the full year. Generally speaking, when the Federal Reserve raises interest rates, it results in larger spreads for banks between the interest rates they pay on deposits and the interest rates they charge on loans. Over the past year, Bank of America's NIM has increased by 16 basis points, and its net interest income for the fourth quarter was $1.2 billion higher than a year ago.
5. Trading revenue came in better than expected
One weak spot among banks engaged in investment banking activities was fixed income trading, and Bank of America was no exception. The bank's fixed-income trading revenue dropped by 13% in the fourth quarter.
However, this is surprisingly good news. Not only did it beat the bank's own expectation for a 15% drop, but it handily beat peers. JPMorgan Chase reported a 34% drop in fixed-income trading revenue, and Goldman Sachs' dropped by 50%. In comparison, 13% doesn't look to bad at all.
6. A great job of expense controls
In addition to improving asset quality and boosting capital levels, expense control has been one of Bank of America's main priorities over the past several years. The bank's noninterest expense dropped by 1% year over year, but this includes the roughly $200 million in year-end bonuses and charitable giving the bank decided to do after the tax reform bill passed.
7. Investments in technology are paying off
You may not think of Bank of America as a technology leader, but that's exactly what it has become. The bank has invested aggressively in new, efficiency-improving technologies over the past few years, and the results have been impressive.
Over the past year alone, the number of active digital banking users has risen by 12%, and the bank's mobile channel has received 33% more logins. Twenty-three percent of the bank's deposits are now mobile, and since Zelle was integrated into the bank's app last year, the bank's person-to-person payment volume has more than doubled.
Just to name a few of the accolades the bank has received, Bank of America was named No. 1 in mobile banking by Javelin, No. 1 in digital sales functionality by Forrester, and its Merrill Edge brokerage platform was named the No. 1 online broker by Kiplinger's.
8. Book value has fallen, but it's for a good reason
You may have noticed that several data points in Bank of America's earnings have stories behind them that show why they're not as bad as they seem, such as the tax-cut charge and the higher charge-off rate. Another example is the bank's book value.
You may notice that Bank of America's book value per share has fallen over the past year, from $23.97 to $23.80. While this may sound alarming, the main reason for this is that there are more shares outstanding than there were a year ago, thanks to Warren Buffett's massive 700 million share investment. Excluding the dilutive effects of these shares, the bank's book value would have increased by about 4% for the year.
2018 could be even better
Overall, Bank of America had a strong fourth quarter, despite what the tax-cut charge and increased charge-off rate might have you believe. Not only did the bank post strong 2017 performance, but it's well-positioned to capitalize on tax reform and rising interest rates going forward.