Summary
- The strong get stronger, as Bank of America posts a healthy fourth quarter, though the beat wasn't so impressive at the pre-provision line.
- Management continues to leverage one of the best deposit franchises among the larger banks, while an organic growth plan and ongoing IT investments support the long-term story.
- Bank of America has outperformed but still offers some upside from here.
Despite a more challenging operating environment, those banks with legitimately strong franchises and cogent growth plans (particularly those with a strong IT/digital element) continue to prosper. I liked Bank Of America (BAC) back in May, and not only have the shares outperformed the banking sector as a whole, they’ve outperformed the S&P 500 as well. Likewise, BofA stands out favorably in its mega-bank peer group, though my preferred choices, JPMorgan (JPM) and Citi (C), have done a little better over that time.
While I still love JPMorgan, Bank of America seems to have a little more appeal now on a valuation basis. This isn’t just a valuation call either; although BofA’s loan growth has come back to earth a bit, the bank continues to take share in the consumer banking market and the company’s ongoing tech investments can unlock further operating leverage down the road.
Not A Blow-Out, But Not Bad
Bank of America’s fourth-quarter earnings weren’t the strongest of its peer group relative to expectations (JPMorgan and Citi were stronger at the pre-provision line), but it was still a good quarter on balance with a small beat at the pre-provision line and guidance for ongoing loan growth in 2020, as well as a continuation of the bank’s branch-based growth plan. Investors should note that financial information is presented on an adjusted core basis – there are certainly differences in what/how analysts call “core”, and your mileage may vary
Revenue rose 1% yoy and fell 2% qoq, coming in about 2% better than expected. Net interest income declined 3% yoy and less than 1% qoq, but still beat expectations due to greater than expected balance sheet growth. Net interest margin was in line with expectations (2.35, down 17bp yoy and 6bp qoq), but earning assets grew 5% yoy and 2% qoq.
Non-interest income rose 2% yoy and fell 3% qoq. Within the core fees, cards were down 1%/up 3%, and trading revenue rose 13% (ex-DVA), with 25% growth in fixed income – not as strong as either JPMorgan or Citi, but not a bad result.
Operating expenses were up 1% both yoy and qoq, driving deterioration in the efficiency ratio after a long run of positive operating leverage. Higher-than-expected opex has been a theme this quarter, so BofA is not unique here by any means. Pre-provision profits fell 4% yoy and about 7% qoq, but that was still good for a small beat ($0.01/share) versus expectations. With a smaller than expected provision expense adding another penny, the rest of the roughly $0.06/share beat relative to the Street came from a lower tax rate. Tangible book value grew 8% yoy and 1% qoq.
