Bank of America (NYSE:BAC) still has a long road to travel before rejoining the ranks of America's most profitable banks, but its third-quarter earnings demonstrate convincingly that it's heading in the right direction.
The top-line numbers at the nation's second-biggest bank by assets weren't anything to write home about. Revenue fell 2.5% compared to the year-ago period, hobbled by persistently low interest rates. The latter fueled a 6.9% decline in net interest income, which accounts for 46% of Bank of America's total revenue.
The Charlotte, North Carolina-based bank's saving grace was a $6.3 billion decline in noninterest expenses. While the bank's core operating costs stayed roughly even with the preceding quarter, it benefited from much lower legal expenses. In the same period last year, Bank of America settled a $16.65 billion lawsuit with the U.S. Department of Justice -- after accounting for legal provisions, this amounted to a $5.3 billion pre-tax charge -- compared to only $200 million in total legal expenses last quarter.
The drop in legal expenses more than made up for the decline in Bank of America's net interest income. As a result, the bank's quarterly pre-tax earnings increased 14-fold, going from $431 million in the third quarter of 2014 all the way up to $6.1 billion in the three months ended Sept. 30, 2015. This allowed Bank of America to outperform the expectations of analysts, who predicted that it would earn $0.33 per share in the third quarter compared to its actual earnings per share of $0.37.
While this is good news, the fact remains that Bank of America still has considerable ground to cover before reaching its profitability targets. Chairman and CEO Brian Moynihan has said on multiple occasions over the past year that the bank's goal is to earn 1% or more on its assets on an annualized basis. This is a noble mark, as the 1% ROA threshold has long served as the dividing line between the industry's best-run banks versus the rest. In the latest quarter, by contrast, Bank of America's net income equated to a mere 0.82% ROA.
That Bank of America has work to do before rejoining the upper echelon of the nation's best banks shouldn't come as a surprise. After all, since 2008, it's incurred a staggering $195 billion in additional costs associated with the financial crisis. No other company in history has survived such a perilous gauntlet.
In Bank of America's case, in turn, its quarter-to-quarter and year-over-year progress matters more than its absolute performance in any given quarter. And it's with this in mind that investors in the $2.2 trillion bank can find hope in its otherwise pedestrian performance last quarter. For the first time since the financial crisis, Bank of America was able to string together four consecutive quarters of solid profits. Since the fourth quarter of 2014, it's earned a combined $16.2 billion, allowing its tangible book value per share to grow on a more consistent basis than it has over any other 12-month stretch since 2008.
I believe shareholders should interpret this as a signal that Bank of America is on the cusp of consistently higher earnings going forward. If so, there's every reason to believe that it will not only be in a position to return more capital to shareholders over the years ahead, but also that its share price should head higher as well.