Lower Operating Costs Highlight Bank of America’s Q3

by Trefis Team
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Bank of America
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Bank of America (NYSE:BAC) recently reported results for the third quarter that were largely along investor expectations, as the diversified banking giant’s revenue streams were driven almost completely by expected industry trends. The Fed’s rate hikes boosted net interest revenues, extremely low volatility in capital markets resulted in sub-par trading revenues, and the continuing pressure on the U.S. housing industry hurt mortgage banking revenues. But the component of Bank of America’s income statement that stood out was the bank’s operating expense, which fell to the lowest level in nine years. This, in turn, helped Bank of America report a quarterly net income figure in excess of $5 billion for the first time since Q2 2007.

While Bank of America’s operating performance over recent quarters has been commendable, the bank had cleaned up nearly all of its legacy mortgage portfolio and has also achieved a strong common equity tier 1 (CET1) capital ratio figure (fully applied) of 11.9%. The bank also gained some ground over recent quarters in the U.S. retail banking industry from rival Wells Fargo’s misgivings. That said, we believe that Bank of America will face revenue headwinds in its cards, wealth management and mortgage operations over coming years from increasing competition and changing industry dynamics. Because of this, we stick to our $25 price estimate for Bank of America’s stock, which is slightly below its current market value. It should be noted that the book value of the bank’s shares at the end of Q3 2017 was $23.92.

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 Q3 2017 compared to the figures in Q3 2016 and Q2 2017. The bank’s strong consumer banking gains stand out here, and were largely driven by higher interest revenues which mitigated the impact of poor mortgage banking fees. While investment banking revenues were low as expected, Bank of America bucked industry trend to report a small increase in debt trading revenues compared to Q2 2017, although the figure was sharply lower year-on-year.

Bank of America’s wealth management unit has been an anchor for the bank’s results over recent quarters due to its stable revenues and margins. And the bank has rightly focused on pushing its wealth management services to its retail banking customers in an attempt to boost inflows while keeping costs low.

Finally, the key factor behind Bank of America’s strong results has been its focus on keeping costs under control. For the quarter, the bank reported total operating expenses of just $13.1 billion – down from the average figure of ~$20.5 billion over 2010-2011 – thanks to its efforts since 2011 to work through its legacy legal issues while also streamlining its business model. This helped the bank reduce its expense-to-revenue ratio to its target level of 60% from 62.3% a year ago.

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