More Improvements Harder to Come by at Bank of America
We are maintaining our per share fair value estimate of the narrow-moat firm.
Narrow-moat Bank of America (BAC) achieved an 11.2% return on tangible common equity during the quarter, and we expect the asset-sensitive company will soon outearn its cost of equity as interest rates slowly rise and expense management improves.
Through the first six months of 2017, the company experienced 7% growth in net interest income on only 3% growth in average earning assets. Management expects that another 100-basis-point upward shift in the yield curve would generate $3.2 billion in additional annual net interest income (the bank recorded $11 billion during the second quarter).
Noninterest expenses were essentially flat from the first half of 2016. We are maintaining our fair value estimate, which represents 1.2 times reported tangible book value per share.
Credit quality remained superb, with net charge-offs totaling just 0.4% of loans, compared with our long-term forecast of 0.6% annually. Bank of America provisioned just $726 million for losses during the quarter, allowing its reserves to fall by 2% as its consumer real estate and energy lending portfolios stabilized. We expect normalization in credit quality to offset some of the benefits from rising rates in the years to come.
Similarly, we note that capital markets have been very good to Bank of America in recent quarters. The firm generated $1.5 billion in investment banking income during the quarter and $3.3 billion in investment and brokerage services revenue. The bank was able to sustain this level of investment banking income in just one of the last five years. Solid flows--customers switched money from deposits to investments--and strong market performance boosted margin and net income within the company’s wealth and investment management business thanks in part to a rising stock market.
The company’s digital efforts appear to be progressing well. Branch count is down by about 10% over the past three years, while mobile banking usage has doubled over the same time period.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, 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.
Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.