Why Bank of America’s Lukewarm Q1 Results Are Not Cause For Concern

Investors were not quite sure how to react to Bank of America’s (NYSE:BAC) results for the first quarter of 2015 when the diversified banking group released them on Wednesday, April 15. ^[1] The bank managed to beat earnings expectations despite reporting a worse-than-expected revenue figure, and the earnings announcement included a long list of positive and negative trends. The things that stand out at first glance justify the decline in Bank of America’s shares on Wednesday – especially the year-on-year reduction in revenues and the sharp increase in operating expenses. What stood out in particular was the fact that each of the bank’s operating divisions (except for the non-core Legacy Assets and Servicing division) reported lower revenues year-on-year even as rival JPMorgan Chase (NYSE:JPM) detailed the exact opposite trend a day earlier (see JPMorgan Posts Strong Q1 Results On The Back Of Debt Trading Gains).

However, it should be noted that the single biggest factor behind Bank of America’s depressed top line figure is its shrinking net interest margin (NIM) figure, which fell to a record low of 2.17% compared to 2.29% in Q1 2014 and 2.18% in Q4 2014. This, coupled with a one-time adjustment of $500 million, dragged down the interest income to $9.7 billion – the lowest level the bank has seen since the economic downturn of 2008. This is a factor which is largely beyond the bank’s control, and will see an improvement once the Fed hikes benchmark interest rates later this year. Moreover the year-on-year decline in fee-based revenues from traditional banking sources was reported by both Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB). So that too appears to be systemic in nature, and not an issue pertaining only to Bank of America.

We believe that these short-term trends do not undermine the strong efforts Bank of America has put in to cut its legal and operating costs over the years, even as it ramps up its lending and wealth management activity. As a result, we stick to our $18 price estimate for Bank of America’s stock, which is almost 15% ahead of the current market value.

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

Trading Desks Drove Revenues To A Large Extent In Q1

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 over $2.7 billion for the first quarter – almost 90% higher than the dismal $1.5 billion figure for the previous quarter, but 7% below the $2.9 billion reported a year ago. While investment banks normally report a peak in trading revenues for the first quarter, Bank of America benefited from the surge in debt as well as currency trading activity this time around, thanks to the Swiss central bank’s unexpected decision to remove the cap on the Swiss franc. The bank’s equity trading desk also chipped in with revenues of $1.15 billion, which is only slightly below the figure reported for Q1 2014. Total trading revenues of just under $3.9 billion for the quarter represented a 65% jump quarter-on-quarter.

Wealth Management Business Anchored Results

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 14% of Bank of America’s total share value comes from its wealth management operations – almost the same as the contribution of its trading desks. The division generated $4.5 billion in revenues for Q1 – slightly below the figure for Q1 2014 largely due to a lower interest income. Notably, this represents almost 22% of Bank of America’s total revenues for the quarter. The steady increase in the size of the bank’s total client assets (which crossed the $2.5-trillion mark in Q1 2015) has been the primary driver of growth in these revenues over recent years.

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1. Bank of America Reports First-quarter 2015 Net Income of $3.4 Billion, or $0.27 per Diluted Share, Bank of America Press Releases, Apr 15 2015 [↩]