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Stock Analyst Update

Strong Fees and Net Interest Boost Bank of America's Q3

We are increasing our fair value estimate for the wide-moat bank.


Wide-moat-rated Bank of America (BAC) recorded solid third-quarter earnings, beating the FactSet consensus EPS estimate of $0.71 with a reported EPS of $0.85. This equates to a return on tangible common equity of 16%. Like peers, Bank of America is seeing historically strong credit quality as net charge-offs fell to 20 basis points of average loans—a 50-year low. Asset improvements led to a provision benefit of $624 million and a $1.1 billion release in reserves. Credit wasn’t the only item that outperformed our expectations, as wealth management and investment banking fees came in ahead of our projections. The bank also seems poised to reach its goal of gaining an additional $1 billion in its quarterly net interest income run rate by the fourth quarter, which we thought the bank might miss. After increasing our net interest income and fee projections, we are increasing our fair value estimate to $38 per share from $35.

We caution investors that the banking sector appears relatively fully valued to us, albeit not supremely overvalued. In our Bank of America model, we are projecting roughly $7 billion in extra NII coming from rate hikes by 2025. The fee environment remains exceptionally strong, and it is admittedly difficult to predict where certain items (like investment banking) might normalize, but we think future outperformance is now about exceeding already decent growth and rate expectations.

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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.