Narrow-moat Bank of America (BAC) generated a 10.3% return on average tangible common shareholders’ equity in the first quarter, helped by pristine credit quality and solid capital markets performance. Net charge-offs totaled just 0.42% of loans during the quarter, compared with our 0.60% long-term forecast. Client balances within the bank’s wealth and investment management business grew 3% during the quarter as the stock market performed well.
Similarly, the investment bank recorded a 45% increase in fees as Bank of America achieved a record in M&A revenue and sales and trading revenue expanded by 23% during the year. We think Bank of America is still making progress, but are not reading too much into an exceptionally strong quarter. We plan to maintain our $22 fair value estimate.
Bank of America’s total expenses were flat during the year despite declines in numerous categories. Employees as well as shareholders are now benefiting from revenue growth, and a roughly $300 million decline in nonpersonnel costs was entirely offset by rising compensation and other human-capital related expenses. Bank of America's reported efficiency ratio was 67% including the effects of seasonal first-quarter expenses. Our fair value estimate incorporates a much lower long-term efficiency ratio--thus, Bank of America still has work to do in order to justify its current share price. It remains to be seen how much more operating expenses can be cut without affecting the business.
Furthermore, it still appears that benefits from rising interest rates will accrue slowly. Management expects that a 100 basis point upward movement in the yield curve would boost annual net interest income by $3.3 billion--a roughly 7.5% increase above the levels achieved in the first quarter. However, the 5% year-over-year growth in net interest income was partly due to an increase in earning assets. Net interest yield was up only 6 basis points to 2.39% over the past 12 months.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.