There's no doubt that Bank of America (BAC 1.17%) has had a rough few years. And this past quarter was no exception, with a decline in revenue weighing on the bank's bottom line. But digging deeper, there was good news too. In the video below, The Motley Fool's senior banking specialist John Maxfield breaks down Bank of America's performance for the three months ended September 30th.
A full transcript follows the video.
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Gaby Lapera: Do you want to talk a little bit about Bank of America?
John Maxfield: Yeah. As listeners may know, and people who read my writing, I follow Bank of America pretty closely and write quite a bit about them. What I found so interesting from this quarter was a point that CEO and Chairman Brian Moynihan stressed on the quarterly conference call. It was the fact that, did Bank of American have an incredible quarter? No.
I think its return on equity for the quarter was 0.82%, when you want a bank to be 1% or higher on its return on assets. It didn't have a great quarter, looking at it as a snapshot. However, if you couple it up with the three previous quarters, building it out to a full year although it's straddling 2014/2015, it was the first time since the financial crisis that Bank of America generated a solid profit for four quarters in a row.
This builds on what we talked about last quarter when Bank of America reported. It looks to me like Bank of America has really turned the corner, finally, and put the majority of those liabilities that were weighing on its earnings that relate to financial crisis, has put those in the rearview mirror.
Now, that doesn't mean that tomorrow Bank of America will be generating 1.5% returns on assets. What it does mean is that you're probably going to see consistent profitability for the most part going forward, and those profitability metrics are probably relatively consistently going to edge up. That's a good thing for shareholders in Bank of America, and for prospective investors because it still trades for a substantial discount to book value.
Lapera: This is also a really good sign for future economic growth for the entire country.
Maxfield: Yeah. That's a really good point. When you think about what dictates economic growth, it's a function of three things -- at least the way economists think about it -- it's a function of labor, capital, and productivity. If you increase any one of those, holding all else equal, you're going to increase your economic growth.
Banks are so important because they increase capital. They don't actually create capital, but they aggregate the savings of the millions of Americans spread around the country who put a little bit of money into their savings account and then banks put all that together and lend it out for people who want to buy houses, which pushes economic growth, or corporations who want to make business investments pushes economic growth.
Banks really stand at the narrows in terms of economic growth. When you have Bank of America, which is your largest consumer bank in the country, still ailing from the financial crisis and is thereby not able to grow its portfolio as quickly as it wants to, that's really going to impact your economic growth.
Even more generally than bank earnings, Bank of America and Citigroup's recovery is a very, very positive and important thing for the United States economy.
