Bank of America’s Q4 Shock Doesn’t Take Away From Strength Of Business Model

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Bank of America (NYSE:BAC) reported a much worse-than-expected performance for the last quarter of 2014 on Thursday, January 15, as shrinking interest margins and a marked reduction in FICC (fixed income, currency and commodities) trading revenues hammered the diversified banking giant’s top line. [1] The bank’s net interest margin (NIM) figure fell to 2.18% in Q4 2014 – the lowest level the bank has seen in at least ten years. In comparison, the figure was 2.44% in Q4 2013 and 2.29% in Q3 2014. The sharp decline in Q4 wasn’t anticipated as Bank of America was one of the few banks that had bucked the trend of a steady decline in interest margins over the third quarter by reporting a 7 basis points (0.07%) increase in NIM figure. At the same time, Bank of America’s debt trading revenues were depressed by the sharp increase in debt market volatility over December that hit revenues across the industry.

In our opinion, these two factors – which are systemic in nature – do not undermine Bank of America’s potential value, especially since the bank reported some promising trends across its operating units. Firstly, the bank’s results were unencumbered by any large legal charge this quarter – something that has plagued the banking industry and Bank of America in particular for several years now. Also, provision charges of $219 million for the period were the lowest the bank has recorded since the economic downturn. In terms of operations, the bank’s card business did well to generate card fees in excess of $1.6 billion for the first time since it decided to do away with its Canadian card operations in late 2011. While steady growth in deposits and loans will ensure profitability in the bank’s retail banking operations once interest rates return to pre-recession levels, the increase in client assets to record levels also reinforces the strength of Bank of America’s wealth management operations.

We maintain an $18 price estimate for Bank of America’s stock. 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 immediately after the results were announced – leading to a 5.2% drop in their value over Thursday.

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FICC Trading Desk Fails To Deliver In Q4

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 under $1.5 billion for the fourth quarter – a good 35% lower than the $2.2 billion figure for the previous quarter, and 30% below the $2 billion reported in the year-ago period. In fact, this was the slowest quarter for Bank of America in terms of FICC trading revenues since the particularly dismal Q4 2011, when the bank made just over $800 million in the wake of the European sovereign debt crisis. The fact that the bank generated $2.5 billion in revenues on average for the first three quarters of the year – and more importantly bucked industry trends for the first two quarters to report a year-on-year increase in these figures – makes the Q4 2014 results appear worse than what they are.

The bank’s equity trading desk fared better, though, with revenues of $911 million being slightly higher than the $899 million Bank of America roped in for Q4 2013. Total trading revenues of under $2.4 billion for the quarter were also the lowest since Q4 2011. On a full-year basis, the trading desks made roughly $13.2 billion over 2014 – 3% below the $13.6 billion figure for full-year 2013.

Wealth Management Business Continues To Drive Profits

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 generated $4.6 billion in revenues for Q4 – slightly below the record $4.67 billion it reported for the previous quarter but 3% higher than the figure for Q4 2013. Notably, this represents almost 25% of Bank of America’s total revenues for the quarter. The steady increase in the size of the bank’s total client assets (which were just shy of $2.5 trillion at the end of Q4 2014) has been the primary driver of growth in these revenues over recent years.

Bank of America saw a slight reduction in Q4 in terms of the “Financial Advisor Productivity” metric it reports for the division. This metric captures the ratio of annualized revenues for the division to the total number of advisors, and was $1,070 for Q4 – falling slightly from the record $1,077 figure for the previous quarter as a result of the sequential reduction in revenues as well as the increase in the total number of advisors over Q4.

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Notes:
  1. Bank of America Reports Fourth-quarter 2014 Net Income of $3.1 Billion, or $0.25 per Diluted Share, Bank of America Press Releases, Jan 15 2015 []