Bank of America: The Winner of Third-Quarter Bank Earnings

Bank of America (BAC +0.00%) was the fourth out of the "big four" U.S. banks to report earnings, and it appears the best has been saved for last. Not only did the bank beat earnings and revenue expectations, but the numbers look pretty strong throughout the bank's business.

Here's a rundown of the important numbers that make Bank of America an early winner of the third-quarter earnings season, especially among bank stocks.

The headline numbers look strong

Bank of America reported results that exceeded expectations on both the top and bottom lines. Earnings of $0.56 per share beat estimates by $0.05 and would have been $0.75 without a one-time $2.1 billion charge the bank took, related to the ended partnership with First Data. This represents impressive 14% earnings growth when compared to the third quarter of 2018.

On the revenue side, the bank generated $23 billion for the quarter, about $210 million more than analysts had been looking for.

Digging a little deeper

Of course, headline earnings and revenue numbers don't tell the full story. After a closer look, it's clear there is little for investors to be disappointed about in the bank's report. Just to name a few of the key highlights:

• In the consumer banking division, loans grew by 7%, and deposits increased by 3% year over year. While it's still early in earnings season, this is likely to be among the best growth metrics in the banking industry, which follows the bank's strong growth in the second quarter. In fact, despite the falling interest rates during the quarter, Bank of America's interest income in consumer banking increased.
• Bank of America's investment banking fee revenue rose 27% year over year and came in significantly higher than expected.
• Within the consumer banking division, growth looks very impressive. The bank has 5% more credit card accounts than it did a year ago, as well as 7% more consumer investment accounts. Mortgage originations and auto originations are up by 58% and 18%, respectively, year to date compared to the same period in 2018.
• Trading revenue has been a weak point throughout the industry recently, and Bank of America slightly beat estimates on both the fixed-income and equities sides of the business.
• Bank of America produced a 11.2% return on equity and a 1.23% return on assets for the quarter (excluding the impairment charge). This is the same ROA as a year ago, while ROE improved by 17 basis points. Efficiency ratio remained at a healthy 57%, which is impressive given the falling-rate environment.
• Bank of America repurchased $7.6 billion worth of common stock in the second quarter alone. Over the past year, the number of outstanding shares has declined by about 8%, and book value per share has risen by 11%.
• Asset quality remains strong. Despite recession fears and other economic worries, Bank of America's net charge-off ratio declined on a quarter-over-quarter basis, even without the positive impact of certain loan sales.

One area investors are watching very closely is Bank of America's interest margin. Net interest margin was a big disappointment in the second quarter, missing expectations by seven basis points. Bank of America is the most rate-sensitive of the large U.S. banks thanks to having a high concentration of noninterest-bearing deposits relative to its overall portfolio. Without getting too technical, this means rising interest rates benefit the bank more than most of its peers, while falling rates hurt Bank of America more.

However, in the third quarter, the bank's investors got some good news in this area. Although net interest margin fell from 2.44% in the second quarter to 2.41% in the third, this is better than the drop to 2.39% analysts had been expecting.

An early winner of earnings season

Bank earnings have been a mixed bag so far, and even the banks with generally positive reports had some disappointing parts. Bank of America, however, looks like it had a pretty strong third quarter all around, so it's fair to say that it's the winner of big bank earnings.