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Bank of America: Has It Become the Best-in-Breed U.S. Big Bank?

By Matthew Frankel, CFP® – Updated Apr 24, 2019 at 9:25PM

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This isn't the same bank we knew just a few years ago.

Check out the latest Bank of America earnings call transcript.

Earnings season is now underway, and as usual, the big banks are among the first companies to report their latest results. Bank of America's (BAC 0.63%) fourth-quarter and 2018 year-end results have been among the strongest we've seen from the industry's largest players.

Not only did the bank surpass expectations on both the top and bottom lines, but it has also made great strides in efficiency and profitability. Here's a rundown of what investors need to know about Bank of America's excellent fourth quarter:

Inside of a Bank of America branch lobby.

Image source: Bank of America.

The headline numbers

Bank of America beat expectations on both the top and bottom lines. Revenue came in at $22.7 billion, over $300 million more than analysts had been calling for. Adjusting for tax reform, this is a 6% year-over-year increase.

What's more, it earned a profit of $7.3 billion for the quarter -- a record for the banking giant -- which translates to $0.73 per share, $0.10 greater than the consensus.

Impressive results

While the headline revenue and earnings numbers were certainly impressive, it's always smart to dig a little deeper to get a sense of how a business is doing. In the case of Bank of America's fourth-quarter and year-end results, there are a lot of good things worth mentioning:

  • Consumer banking was especially strong in the quarter. Deposits and loans grew by 3% and 5%, respectively, and Merrill Edge brokerage assets actually grew by 5%, despite the stock market decline in the fourth quarter. This is because $25 billion of net assets flowed into accounts, indicating an excellent growth rate. Plus, mobile banking usage was up 16%, a big contributor to increased efficiency, as we'll get to in a bit.
  • Interest margins have increased. The bank's net interest yield is up by nine basis points to 2.48% from the same quarter a year ago.
  • Bank of America generated a 11.6% return on equity and a 1.24% return on assets. Both are well in excess of the 10% and 1% industry benchmarks, respectively.
  • The bank continues to become more efficient. Its fourth-quarter efficiency ratio dropped to 58% from an adjusted 62% a year ago (lower is better). In other words, it costs Bank of America four cents less to generate each dollar of revenue now than at the same time last year. Higher revenue plus improved efficiency equals excellent earnings growth. Even adjusting for the benefits of the Tax Cuts and Jobs Act, Bank of America's earnings per share increased by 49% year over year.
  • During 2018, Bank of America spent $20.1 billion on share repurchases and reduced its share count from 10.29 billion to 9.67 billion, or approximately 6%.

It wasn't all good news though

As per usual, Bank of America's earnings report wasn't 100% positive. As we've seen with the bank's peers that have already reported, trading revenue was a disappointment, particularly on the fixed-income side.

However, equities trading rose by 11% and helped to offset the decline. In all, trading revenue was up by 1% -- consistent with its peers.

The takeaway

This quarter's earnings report really shows just how far Bank of America has come since the dark days of the financial crisis. The bank is putting up numbers that are on par with higher-valued peers such as JPMorgan Chase and Wells Fargo, and trades at a far lower price-to-book multiple.

To sum it up, Bank of America currently looks like the best value among the big banks and isn't far from being a clear best-in-breed.

Matthew Frankel, CFP owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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