Please ensure Javascript is enabled for purposes of website accessibility

Bank of America Earnings: Better Margins, Strong Asset Quality, and an All-Around Good Quarter

By Matthew Frankel, CFP® - Updated Oct 15, 2018 at 10:19AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Bank of America continues to grow and improve in a sustainable way.

Bank of America (BAC 0.95%) is the last of the "big four" U.S. banks to report its third-quarter earnings. Although investors may have had to wait, they have little reason to be disappointed by the bank's performance. Not only did Bank of America beat expectations on both the top and bottom lines, but the business looks pretty solid all around.

With that in mind, here's a quick rundown of the headline numbers, the other key points investors should know, and what to watch for going forward.

Interior of a Bank of America lobby.

Image source: Bank of America.

The headline numbers

First, looking at the top and bottom lines, Bank of America did quite well in the third quarter. Earnings per share of $0.66 were $0.04 higher than analysts had been looking for and represented a sharp 43% increase from the same quarter in 2017.

Revenue grew by 4% from last year to $22.8 billion, which beat analysts' expectations by approximately $130 million.

Although earnings and revenue beat estimates, these two metrics never tell the full story of how a particular company did, so let's take a closer look.

Going a little deeper

Taking a look past the headline numbers shows that Bank of America had a pretty strong quarter throughout its business. Here are some key highlights investors should pay attention to:

  • Noninterest expense fell by 2% year over year. This is especially impressive considering that revenue grew by 4% and translates to a strong 57% efficiency ratio.
  • Return on assets (ROA) of 1.23% and return on equity (ROE) of 11% are major improvements and are well in excess of industry benchmarks.
  • Total loans grew by 3% (including 6% growth in consumer banking loans) and deposits are up by 4%.
  • Merrill Edge brokerage assets continue to grow at a double-digit pace and crossed $200 billion for the first time -- a year-over-year 22% growth rate.
  • The bank's provision for credit losses was perhaps the biggest surprise -- down by $111 million from the second quarter to $716 million on stronger loan quality in key areas of the business, such as energy.
  • Bank of America's net interest margin rose by four basis points to 2.42%. Rising interest rates typically translate to better profit margins for banks, and it's encouraging to see the numbers reflect this.

Keep an eye on interest margins

Speaking of Bank of America's net interest margin, this is an area I'll be watching especially closely during the fourth quarter.

Here's why: Longer-term interest rates (such as the 10-year Treasury yield) have spiked recently, and consumer interest rates such as those on mortgages have risen as well. This should translate into better margins for banks, and Bank of America should especially benefit with its low-cost deposit base. However, the move happened after the end of the third quarter, so it will be interesting to see whether it translates into a meaningful increase in margins for the last quarter of 2018.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts.

A strong quarter with few surprises

Bank of America's third quarter was strong, but there was nothing in its earnings report that was too surprising. In fact, slightly beating earnings and revenue expectations has become somewhat of a pattern for the bank, which is likely why its stock price isn't reacting too much after the announcement.

Having said that, this quarter should give Bank of America investors something to smile about, as it shows that the bank's objectives of cutting costs, embracing technology, and maintaining excellent asset quality are progressing quite well.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$37.02 (0.95%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.