Bank of America (BAC 1.53%) recently announced earnings results for the fourth quarter and full year of 2021 that beat estimates. But beyond the results, management's outlook and guidance for this year confirmed to me that the nation's second-largest bank by assets is a safe pick right now in what has been and remains an extraordinarily difficult market in the past few months. Here's why.
More consistent revenue
After nearly two years in a low-rate environment with very little loan demand, it looks like loan growth has finally returned and may accelerate this year, despite the projected interest rate hikes from the Federal Reserve.
Bank of America did fine in 2021, but that's largely because of the strong performance in its corporate and investment banking division, along with reserve capital releases after anticipated loan losses never really materialized. Average loan balances grew nearly 3% in the fourth quarter of 2021, driven by stronger commercial loan growth and decent consumer loan growth as well.
Net interest income (NII), the profits banks make on loans and securities after covering the cost of funding those assets, hit $11.5 billion in Q4, which was up $1.2 billion from NII in the first quarter of 2021. Furthermore, new Chief Financial Officer Alastair Borthwick pointed out that because of the enormous growth of the balance sheet in recent years NII has already reached the same level as the middle of the last rate cycle, even though rate hikes have yet to begin.
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Borthwick said management thinks the bank will see high-single-digit percentage loan growth this year, which would be much higher than the loan growth before the start of the pandemic. Bank of America is also highly asset sensitive, meaning more of the yields on its assets like loans will reprice higher than those on its liabilities such as deposits when the Fed raises interest rates. The bank noted that as of the end of 2021, a 1% move in short- and long-term interest rates would enable the bank to realize $6.5 billion of additional NII over the next year. Many project the Fed to increase short-term rates to about 0.75% or 1% by the end of this year.
In other divisions, Bank of America's investment banking pipeline remains very healthy and wealth management is trending well, as advisors are able to meet with more customers in person again and increase the pipeline of new business.
Expenses and credit
In 2021, total expenses at Bank of America came in at just under $60 billion, up about 8% from last year. Most of the increase came in salaries and marketing, but the bank also dealt with COVID- and revenue-related expenses in 2021.
The good news is the pain appears to be over, as Borthwick said management thinks it can hold expenses unchanged this year versus 2021. If it can, that would likely be considered a monumental achievement, given the wage inflation banks are dealing with, as well as the need to invest in digital capabilities and infrastructure to compete with fintech companies and other competitors. JPMorgan Chase saw expenses rise 7% in 2021 and has forecast that expenses will grow another 8% or more this year as well. Bank of America has now generated positive operating leverage for the last two quarters, meaning it grew revenue at a faster rate than expenses. With expenses expected to be unchanged this year and revenue rising, the bank looks like it has a good chance to generate positive operating leverage in 2022.
Credit quality remained pristine in Q4, with Bank of America's net charge-off rate, which shows debt unlikely to be collected as a percentage of the entire loan book, improving from Q3 levels and now is down to just 0.15%. Management eventually expects charge-offs and delinquencies to creep back up, as the bank adds more new loans and as consumer savings begin to run down, but Borthwick said delinquencies have also remained low and he thinks charge-offs and delinquencies are "going to bump around here for a little while."
Looking very sturdy
Banks always come with some risk, given that they are heavily linked to the economy. If inflation and interest rate hikes accelerate faster than expected, that could slow loan growth and increase credit costs. But the consumer and the economy still look very healthy. In the difficult market that we now are in, I think Bank of America is a safe pick to perform well this year, and will likely see its stock price rise as well.
