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Stock Analyst Update

Strong 3rd Quarter for Bank of America

Superb credit quality and declining expenses led to a solid quarter for the narrow-moat bank.

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Narrow-moat  Bank of America (BAC) continued its solid results in the third quarter. Expense declines continued while revenue increased, leading to the efficiency ratio improving to 57% this quarter on a fully taxable-equivalent basis, from 58% last quarter. Credit quality was superb with provisioning even declining further to a multi-quarter low. Net interest income still managed moderate growth, at 5% year over year. The bank reported a 1.23% return on average assets and a 15.5% return on tangible common equity, both were the best results year to date. As these results largely fit within our overall thesis for Bank of America, we are maintaining our fair value estimate of $29 per share.

Consumer Banking was once again a major contributor to the strong performance in the quarter. Not much more could have gone right for the segment, as revenue was up, expenses and provisioning were down, and profits were up. Card income was up over 3% year over year, and balance sheet growth along with expanding net interest margins helped push net interest income up over 10% over the same period. Brokerage assets continued to climb for the segment, up over 20% year over year. Global Wealth and Investment Management also saw strong net income growth, up 31% year over year, as asset management fees were up 9% and assets under management continued to experience positive net flows. I-banking and trading-related revenue were generally down for the quarter, as revenue was down year over year for the Global Banking segment, and sales and trading revenue were down for the Global Markets segment. We would expect some variability within these segments, as markets wax and wane, but we like the strong trends within the core consumer and wealth management businesses and expect these to continue to drive performance going forward.

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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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