Bank of America Turns a Corner in 2Q

The company’s total loan balance grew by $8 billion during the quarter, as strong growth in core commercial and consumer loans (both up 6% during the year) offset declining balances in legacy portfolios. Credit card, auto, and residential mortgage balances all grew slightly over the past three months. We think Bank of America’s significant core exposure to consumer lending (14% of total assets as of June 30) and its considerable expenses related to legacy mortgage exposure ($900 million in the second quarter) will make the bank a prime beneficiary of an improving housing market.

That said, headwinds remain in other areas of the business. Adjusted net interest yield fell to only 2.22% during the quarter. While the Federal Reserve is widely expected to begin raising short-term rates this year, we note that even an immediate 100 basis point parallel shift would add only $3.9 billion in net interest income and the pace of increases is likely to be more gradual. It’s also possible--as peers have indicated--that depositor behavior may be more aggressive than in the past as rates rise. Furthermore, our valuation incorporates $7.7 billion in additional net interest income over the next five years due to a combination of growth and yield curve normalization. We’re therefore unlikely to change our fair value significantly as rates move.

We believe Bank of America is nearing the end of its ability to realize the benefits of cost-cutting. The company is finally back on the offensive, which should result in a bit more upward pressure on expenses than B of A has experienced in recent years.

Morningstar Premium Members gain exclusive access to our full Analyst Reports, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.