Despite Q3 Loss, BofA’s Operating Performance Improves

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When Bank of America (NYSE:BAC) announced its $16.65 billion mortgage settlement with a string of government agencies in August, it was easy to conclude that the associated pretax charge of $5.3 billion would drag the bank’s quarterly results into the red (see BofA Likely To Report Q3 Loss Over Record $16.65 Billion Mortgage Settlement). So when the diversified banking giant revealed a net loss for the third quarter of the year on Wednesday, October 15, investors weren’t surprised. [1] Looking beyond the expected loss, however, there is evidence of a very tangible improvement in the bank’s profitability over recent quarters.

Firstly, the bank’s net interest income increased after falling for two consecutive quarters thanks to a 7 basis point improvement in net interest margins (from 2.22% in Q2 2014 to 2.29% in Q3 2014). This is impressive given that competitors JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) reported a decline in interest margins for the period. Although Citigroup (NYSE:C) also saw an improvement in this metric for Q3, it should be noted that Bank of America achieved similar growth without the benefit of the former’s extensive global presence.

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Moreover, each of Bank of America’s operating divisions except for the mortgage arm – which incurred the settlement expenses – saw a decent improvement in pre-tax income year-on-year. This can be largely attributed to continued cost benefits from the bank’s ongoing reorganization plan – Project New BAC. The bank’s operating expenses (adjusted for litigating costs) were $14.2 billion in Q3 – a 7% improvement compared to the $15.3 billion figure in Q3 2013 and 3% below the $14.6 billion figure in Q2 2014.

We maintain a $18.50 price estimate for Bank of America’s stock, as the reported numbers were largely in line with our estimates for the period. While this price is almost 20% ahead of the current market value, a bulk of the price difference is due to the strong sell-off in the bank’s shares over the last few days (and on Wednesday in particular) over the looming possibility of a delay in hiking interest rates by the Federal Reserve.

See our full analysis for Bank of America’s stock here

Trading Revenues Remain A Key Driver Of Top-Line Growth

Bank of America reports the performance of its trading operations as a part of its Global Markets operating division. Excluding the impact of CVA/DVA accounting charges, the bank’s fixed income, currencies and commodities (FICC) trading desk reported revenues of $2.2 billion for the third quarter – 5% lower than the $2.4 billion figure for the previous quarter, but a good 10% higher than the $2 billion reported in the year-ago period. The bank’s equity trading desk also did well to rope in revenues in excess of $1 billion for the third consecutive quarter. Equity trading revenues saw a 6% jump compared to Q3 2013.

Taken together, the trading desks churned out $3.3 billion in total revenues in Q3 2014 – almost 30% of the banking giant’s total non-interest income for the period. The sustained strong performance makes Bank of America stand out among the country’s biggest banking giants as the only firm to see a year-on-year improvement in trading revenues for each of the last three quarters.

Record Wealth Management Profits Boost Profitability

Bank of America’s wealth management operations may not be responsible for driving the top line as aggressively as its trading operations, but it definitely provides the bank’s diversified business model a steady and reliable revenue stream – one that has anchored results for several quarters now. According to our estimates, roughly 13% of Bank of America’s total share value comes from its wealth management operations. The division roped in a record $4.7 billion in revenues for Q3 – a little more than 22% of the bank’s total revenues. Coupled with a release in loan provisions and an improvement in operating expenses, this translated into a record pre-tax income figure of $1.3 billion for the division.

Bank of America also saw a marked improvement in its performance in terms of the “Financial Advisor Productivity” metric it reports. This metric captures the ratio of annualized revenues for the division to the total number of advisors, and was $1,077 for Q3 – the highest since Bank of America acquired Merrill Lynch in September 2008.

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Notes:
  1. Bank of America Reports Third-quarter 2014 Net Income of $168 Million on Revenue of $21.4 Billion(A); Loss of $0.01 per Share After Preferred Dividends, Bank of America Press Releases, Oct 15 2014 []