Bank of America Shares Jump As Effective Cost Management Helps Profits Reach Four-Year High

Bank of America (NYSE:BAC) managed to beat investor expectations in terms of revenue and earnings figures for the second quarter of 2015 on Wednesday, July 15. ^[1] The diversified banking giant reported a year-on-year increase in total revenues after five consecutive declines, primarily due to a $669 million accounting gain from the revaluation of its debt securities. But investors overlooked this factor – choosing to focus on the fact that non-interest expenses for this quarter were the lowest the bank has reported since Q4 2008. Expenses of just $13.8 billion in Q2 allowed Bank of America to notch earnings just shy of $5 billion (the highest since Q3 2011) despite reporting a reduction in revenues for each of its core operating divisions compared to the year-ago period.

Investors cheered the marked improvement in operating costs, as Bank of America’s shares gained 3.3% over trading on Wednesday. While the current low interest rate environment continues to put pressure on the banking sector as a whole, we believe that the ongoing steps towards higher operating efficiency will have a strong positive impact on the bank’s long-term value. As a result, we have raised our price estimate for Bank of America’s stock from $18 to $19. The new estimate is roughly 10% ahead of the current market value.

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

Equities Trading Continues Strong, While The FICC Trading Desk Has A Lukewarm Quarter

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 $2.15 billion for the first quarter – 22% lower than the $2.7 billion figure for the previous quarter, and 9% below the $2.4 billion reported a year ago. This was largely expected, though, as global debt trading activity fell considerably in May and June after a strong start to the quarter in April.

The equities trading desk continued to excel, though, as it churned out $1.18 billion in revenues over Q2 – making it one of the best quarters for the bank in this regard over recent years. Total trading revenues of $3.3 billion for the quarter were only marginally lower than what the bank reported last year.

But the highlight of the division’s performance was the notably lower operating cost figure, which fell to $2.7 billion in Q2 2015. This represents a 13% reduction in non-interest expenses sequentially and a 5% decline year-on-year. Bank of America achieved a profit margin of 36% for this division in Q2, and we expect this figure to increase to roughly 37% for full-year 2015. You can understand how operating margins for the Global Markets division impact Bank of America’s share value by making changes to the chart below.

Wealth Management Division Reports Another Strong Quarter

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 11% of Bank of America’s total share value comes from its wealth management operations.

The division generated $4.6 billion in revenues for Q2 – slightly below the figure for Q2 2014 due to lower interest income, but an improvement quarter-on-quarter. Notably, this represents almost 21% of Bank of America’s total revenues for the quarter. The steady increase in the size of the bank’s total client assets, which reached a record $2.52 trillion by the end of Q2 2015, helped improve fee-based revenues. The size of assets under management benefited from $14.6 billion in fresh inflows this quarter. Bank of America’s continued focus on this division also becomes evident from the fact that there has been a sizable increase in the number of core wealth  management employees since the end of last quarter.

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1. Bank of America Reports Second-quarter 2015 Net Income of $5.3 Billion, or $0.45 per Diluted Share, Bank of America Press Releases, July 15 2015 [↩]