Narrow-moat Bank of America’s (BAC) results continued to improve in the first quarter. The efficiency ratio fell from 62.8% in the first quarter of 2017 to 59.7%, as noninterest expenses actually fell slightly year over year. At the same time, credit quality remained superb and both net interest income and noninterest income grew. The bank reported a 1.21% return on average assets and a 15.3% return on tangible common equity as a result. We are raising our fair value estimate by $2, to $29 per share, as we incorporate the quarter’s results.
Capital markets performance was a major contributor to the strong performance in the quarter. On a line-item basis, investment and brokerage services and trading account profits were responsible for the bulk of noninterest revenue growth. The bank’s global wealth and investment management segment generated record pretax income, aided by rising asset management fees on growing client balances and inflows. Global markets net income remained elevated on higher activity in equities, rates, and currencies.
Bank of America is also continuing to invest in convenience, processing more than a quarter of consumer sales digitally, restructuring its branch and ATM network, and entering new cities. We think the scale advantages possessed by a handful of money center banks are beginning to outweigh the diseconomies of scale suffered in the years following the financial crisis. We believe the ability to invest in technology is gaining in importance as consumers increasingly accept the idea of a broad financial marketplace accompanied by automated service. At the same time, large banks have fully integrated past acquisitions, and regulatory pressures are beginning to wane.
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Jim Sinegal does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.