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Stock Analyst Update

Bank of America Posts Strong Profits in Second Quarter

We're maintaining our fair value estimate of $35 per share.


Wide-moat-rated Bank of America (BAC) recorded strong second-quarter earnings, beating the FactSet consensus EPS estimate of $0.77 with reported EPS of $1.03. This equates to a return on tangible common equity of 20%. The second-quarter earnings included a $2.0 billion positive tax adjustment related to deferred tax assets and the release of another $2.2 billion in reserves, on top of the $2.7 billion the bank released last quarter. While we had adjusted our estimates to account for larger reserve releases than we previously predicted, the firm's provisioning for credit losses once again came in better than expected. With loan-loss reserves at $15.7 billion, putting the loan reserve ratio at roughly 1.55%, the bank still arguably has room for additional reserve releases, although most of them should be behind us at this point. Predicting the timing is difficult, and these boosts to earnings are temporary.

We’ll also note that color on 2022 expenses, while not official guidance, did seem to shade toward a run rate a bit higher than we had been expecting. This caught us a bit by surprise. Whereas expenses were previously shaded toward flat to down in 2022, implying a sub-$14 billion quarterly run rate, it seems a low $14 billion run rate is now expected. Again, this wasn’t official guidance, but the color did seem to differ from numbers implied by previous guidance ranges.

After incorporating these results into our projections, we are maintaining our fair value estimate of $35 per share. Within this valuation, we have updated our rate hike outlook to include increases starting in late 2023, a bit earlier than we had previously expected, and we have also incorporated a corporate tax hike to a statutory rate of 26%.

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Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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