Key Takeaways From Bank Of America Earnings

Bank of America (NYSE:BAC) had no trouble exceeding the already high expectations investors had for its first quarter results earlier this week, as it made the most of the jump in securities trading activity as well as the improving interest rate environment to report a year-on-year and sequential improvement in revenues across its operating divisions. ^[1] Notably, the Fed’s recent rate hikes helped Bank of America report net interest revenues in excess of $11 billion for the first time since Q2 2011 – something that drove up consumer banking revenues for a period that is usually a seasonally weak one for traditional loans-and-deposits services. While the bank’s Global Markets division benefited from the ongoing trend of elevated debt trading activity, its Global Banking business gained from the sharp increase in debt and equity underwriting fees.

Bank of America’s reported ratio of loan allowances to gross loans outstanding shrunk further from 1.24% in the previous quarter to 1.22% in the current quarter – something we believe is a clear indicator of the fact that the bank has cleaned up its portfolio of poor mortgages acquired from Countrywide at the peak of the downturn. Besides having cleaned up its balance sheet over the years, the bank has also been able to strengthen itself by achieving a strong common equity tier 1 (CET1) capital ratio figure (fully applied) of 11%. This should allow the bank to return more cash to investors through dividends and share repurchases over subsequent quarters. Keeping this in mind, we have revised our price estimate for Bank of America’s stock upwards from $23 to $24. The revised share price is around the book value of the bank’s shares ($24.36), and is slightly ahead of its current market value.

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

The table above summarizes the factors that aided Bank of America’s pre-tax profit figure for Q1 2017 compared to the figures in Q1 2016 and Q4 2016. The year-on-year improvement across divisions is evident here, especially the sharp increase in trading and investment banking revenues. As the “All Other” division consists of Bank of America’s non-core operating units, it witnesses sizable one-time gains and losses (usually linked to disposals) – explaining the sizable differences from one quarter to another.

As we have pointed out in the past, a very important factor behind Bank of America’s strong results over recent quarters has been its focus on keeping costs under control. In Q4 2016, the bank reported total operating expenses of less than $13.2 billion for the first time since the bank’s acquisition of Merrill Lynch and Countrywide at the peak of the economic downturn – down from the average figure of ~$20.5 billion over 2010-2011 thanks to the bank’s efforts since 2011 to work through its legacy legal issues while also streamlining its business model. Although compensation expenses jumped substantially in Q1 due to a combination of seasonal factors as well as from an increase in performance-linked pay, the bank did very well to chip away at non-compensation expenses further. This helped the bank reduce its expense-to-revenue ratio from 71% a year ago to below 67% in Q1 2017.

Every Investment Banking Unit Saw Revenues Improve In Q1

Bank of America reports the results of its trading operations as a part of its Global Markets operating division, while a majority of the investment banking (advisory & underwriting) revenues come from the Global Banking division. Taken together, total trading and investment banking division revenues for Q1 2017 were almost $5.7 billion – its best quarterly performance since Q1 2014. The table below details the changes in Bank of America’s investment banking revenues for Q1 2017 compared to Q1 2016 and Q4 2016.

As seen here, Bank of America reported a stronger performance for each of its investment banking services, with the largest gains coming from its FICC (fixed income, currencies and commodities) trading desk. While the first quarter of a year is usually the strongest period for the seasonal investment banking business, debt trading activity also received a boost in March from the Fed’s rate hike. Also, the rally in equity market valuation translated into sizable mark-to-market gains for all investment banks.

While Q1 2017 was a strong period for debt and equity underwriting activity, the period witnessed sub-par M&A activity levels. Bank of America did well to grow its M&A advisory fees despite industry headwinds.

Wealth Management Division Reports Record Pre-Tax Margins

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 over recent years. According to our estimates, more than 10% of Bank of America’s total share value comes from its wealth management operations, and the bank refocused the division last year by completing the sale of its money market fund offerings to BlackRock.

Bank of America’s efforts to push its wealth management services has allowed it to report a strong inflow of assets for each of the last four quarters. This coupled, with an overall improvement in market valuation across asset classes since Q1 2016, helped its total client balances swell to a record $2.58 billion by the end of Q1 2017. Client balances include Bank of America’s assets under management, brokerage assets, assets in custody as well as loans and deposits held by the bank’s wealth and investment management division.

The table below summarizes the factors that contributed to the change in size of wealth management assets from the end of Q1 2016 and Q4 2016.

Strong overall inflows are good news for the division in the long run, as they should boost both fee-based as well as performance-related revenues. Notably, while revenues for the wealth management division jumped thanks to increased net interest revenues as well as from higher fee incomes, the bank reduced the number of financial advisors on its payroll from over 16.8K at the end of 2016 to below 16.6K now. This led the division’s “Financial Advisor Productivity” metric (the ratio of annualized revenues for the division to the total number of advisors) to a record $999,000 for the quarter. At the same time, the resulting reduction in operating expenses helped pre-tax operating margins for the division improve to an all-time high of 27%.

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1. Bank of America Reports First-Quarter 2017 Financial Results, Bank of America Earnings Release, Apr 18 2017 [↩]