You may recall that I recently discussed why Bank of America (NYSE:BAC) was one of my top blue chip top picks for 2017. So, that tells you what camp I am in on this name which is becoming debated heavily once again. Here is my take in a nutshell. The reasons I like the name extend beyond just rising interest rates, but actually reflects many other fundamental improvements, which is evidenced by recent performance. That is what matters. Performance. We need data and evidence to support the bull case. However, the same data can be used in the bear case. Some think it is overvalued. Some think it is fairly priced. And some think is it going higher, like I do. In just the past three week alone there have been a number of solid pieces describing each of these cases, on average on every other day:
Bank Of America – Why I See 11% In One Month Possible Here by Markos Kaminis
Bank Of America: These Declines Will Be Temporary by Dividend Investors
Bank Of America – Buckle Up by Leo Nelissen
Retirement Strategy: Now Is Not The Time To Bury Your Head In The Sand by Regarded Solutions (good to see you writing again Alan)
Bank Of America Is Overvalued – Really? By Damon Verial
Bank Of America: Is This The Beginning Of A Crash? By Achilles Research
Bank Of America: Major Positive Catalyst Looms by David Alton Clark
Bank Of America: There Is Better Value Elsewhere by Labutes IR
Bank Of America Is Just Getting Started by Nicholas P. Cheer
Bank Of America – Sell by Leo Nelissen
This Bank Stock Is Poised For Another Leg Higher by Markos Kaminis
Bank Of America: The Party Has Only Just Begun by David Alton Clark
Clearly the bulls outnumber the bears in terms of the opinionmakers over the last couple weeks. I invite you to read and review each of these pieces to help crowdsource your own opinion formation. While all of the points raised across these articles contribute meaningfully to the discussion, what really matters is performance, and expectations. When performance is high and expectations are positive, we have a strong case for sustained momentum. When expectations are low, stocks tend to trade lower, and then move heavily on strong earnings. Right now, I think expectations are slightly above average for Bank of America, and I will add that it is in a sector that has a lot going for it. The name is about flat in 2017, although traded to its highs in March. I think pullbacks are opportunities here. The data is strong. Frankly, comparing the last few years of data, the improvement is staggering. When I talk about performance I don’t just mean on the top and bottom lines but also in several key metrics that I follow closely for all major banks. An under the hood look at the company’s most recent earnings and key metrics continue to support the bull case for banks in general, but also for Bank of America.
While we must look past the headlines, in the most recent quarter, the bank saw a top and bottom line number that beat analyst estimates. The quarter was strong overall. Revenue was $22.2 billion, up 6.8% year-over-year. It was nice to see this stronger than average rise in revenue. That should be considered a positive indicator to anyone. With this rise, the company trounced analyst estimates by $590 million. Expenses were well managed and as such the company saw net income jump to $4.9 billion and earnings per share increased 46% to $0.41. I will point out that this was a nice beat versus expectations of $0.06.
I was pleased to see that both net interest income and non-interest income, two of the biggest sources of cash for the company, were positive. Net interest income was $11.1 billion up 5% from last year’s comparable quarter. Non-interest income was also year-over-year helping revenues surpass estimates. Non-interest income came in at $11.2 billion net, rising 9%. That is strong. On yet another positive note, 1.2 million credit cards were issued, which bodes well for future potential interest income as well as fees generated from the card. Consumer spending is up. As for spending on credit cards, this was up was up 5%.
What I thought was key, and is something I will continue to watch, is that the efficiency ratios in most of the business segments improved year-over-year. We saw the highest efficiency in Global Banking, where the ratio was 43%. Global Wealth and Investment Management saw the poorest ratio, where it was 73%. The overall efficiency was down to 66%, improving from 70.5% last year. This is the one area where I want to see the bank improve. It is doing so much better and there is much work to be done, but it bears repeating that this is the strongest Q1 we have seen in years on this metric.
Loans were up in most categories and came in at $915.7 billion in the quarter, which is down a tick, from the sequential quarter. This was primarily due to declines in Global Market loans. Turning to deposits, total average deposits were up year-over-year. They rose to $1.27 trillion in Q1 2017, from $1.21 trillion last year. As far as non-performing assets are concerned, over the last few years the company has significantly cut down its toxic assets. It was a big plus to see that non-performing loans decreased once again to $7.64 billion, down from $8.08 billion last quarter.
As many of my readers are aware, I am most concerned about a growing loan and deposit record, a decent efficiency ratio, as well as of course revenues and earnings. These metrics can give us an indication of where the bank is heading, and can help us separate the strong from the weak in the sector. As for the major metrics, I am not looking for major growth/improvement. And yet, we saw improvement in nearly every metric, including the decline in non-performing assets. All things considered, the key metrics are solid. With interest rates rising it can only help net interest income longer-term. The largest banks stand to gain and Bank of America is no exception. I maintain a buy rating on Bank of America for the long-term.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BAC over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.