Bank of America (NYSE:BAC) reported its third quarter earnings this morning, and surprised the market by posting better results than the market was expecting. The company still reported a loss, but it was due to one-time expenses, and wasn't quite as bad as analysts thought it would be.
So, what were the highlights of this quarter? What should shareholders pay special attention to? And, what could it mean to the bank going forward.
The numbers look great
Bank of America's third quarter numbers looked good across the board. Overall, the company was expected to report a loss of $0.09 per share on $21.36 billion in revenue. And, while the bank's revenue actually fell a little short of this figure, the loss was just one cent per share.
In other words, Bank of America was able to absorb $5.3 billion of Justice Department settlement costs and barely lose any money for the quarter.
Consumer and Business Banking
And the individual business segments did very well. The Consumer and Business Banking (CBB) segment saw a 4% rise in net income, but grew in ways that should translate into more revenue in the future.
For instance, client brokerage assets increased by an impressive 21% year-over-year, and saw positive inflows of money. In other words, the value of the assets didn't just come from the fact that the market had a good year. People are putting new money into their Bank of America brokerage accounts faster than they're taking it out.
Additionally, the company issued 1.2 million new credit cards during the quarter, a 15% annual increase. Now, this is an excellent example of delayed income. Banks generally don't make money when they issue cards. In fact, depending on the introductory offers they use to attract new cardholders they may even lose money at first. However, this should produce a very nice boost in revenue down the road.
The Consumer Real Estate Services (CRES) segment is the only one that saw an annual decrease in net income, and it is mainly due to a massive industrywide drop in mortgage activity.
Even so, the results were somewhat encouraging, with an increase in mortgage and home equity loan originations from the second quarter. And, the majority of the $5.2 billion loss the segment reported was due to a $5 billion year-over-year increase in litigation expense resulting from the DoJ settlement.
Global Wealth and Investment Management (GWIM) posted its highest revenue and earnings ever, on asset management fee growth of 19% and net inflows into client accounts.
And finally, the Global Banking and Global Markets segments saw revenue increase as well, on strong growth in commercial lending and trading activity.
But it might be even better than it looks
There are two things that I think are the most promising statistics in Bank of America's earnings; the improving credit quality and the company's success in cross-selling its products.
First, the company's net charge-offs dropped by 38% since the same quarter last year. And, the charge-off ratio of 0.46% is the company's lowest in a decade.
Second, and possibly even more important, is the bank's newfound effectiveness in selling new products to its existing customers. Of the 1.2 million new credit cards the bank issued during the quarter, 64% of them went to the bank's existing customers.
Why is this so important? Well, aside from the fact that it means more business, it also is a much more efficient method of expansion. According to one report, it costs a bank eight to ten times as much to attract a new customer as it does to sell another product to an existing one.
Where do we go from here?
Bank of America is doing very well, and a lot of the positive aspects of this earnings report aren't reflected in the company's profits yet, such as the increased brokerage assets and credit card issuance.
And, I think we'll also see the bank's overhead drop significantly over the coming years. In this quarter alone, the company reported that there are 76 fewer branches than last quarter, and nearly 300 less than a year ago. And, the full-time workforce has dropped by 7% in the past year.
To sum it up, Bank of America is growing and improving in all the right ways, and is taking the necessary steps to operate more efficiently. And now that the biggest legal issues are in the past, the future is looking bright.