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Stock Analyst Update

Increasing Our Fair Value for Bank of America

The wide-moat firm reported decent fourth-quarter results.


Wide-moat Bank of America (BAC) reported decent fourth-quarter results. Revenue was down 1% year over year, net interest income was down 3%, and fee income declined roughly 1.5%. Bank of America was still able to keep the expense base roughly stable, with expenses up only 1%. Even so, share repurchases still helped achieve 6% EPS growth in the quarter. Excluding a charge related to a joint venture taken in the third quarter, Bank of America was able to grow EPS 12% for full-year results. The adjusted return on average tangible common equity was 15.8% for the year, a solid result.

Management provided its initial outlook for 2020, maintaining its goal of keeping expenses roughly stable, while it expects net interest income growth to be challenging, due to past rate cuts rolling through into 2020 results. Overall, we would expect moderate balance sheet growth to help keep net interest income down only a low-single-digit percentage, while moderate fee growth and expense control help make up the difference. We will remind investors that they should expect a step up in credit reserves in first-quarter 2020 results as the current expected credit losses methodology is implemented. After making several minor adjustments to our model, we are increasing our fair value estimate to $33 from $31.

Overall, despite slower revenue growth, Bank of America still had a lot of strong points during the quarter. Consumer deposits, investment assets, payment volumes, and digital engagement all continue to grow. Global wealth and investment management continues to see client balances grow at a strong rate, up 16% year over year, driven by AUM flows and growth within brokerage. The bank grew I-banking share in 2019, and sales and trading revenue bounced back compared with fourth-quarter 2018. We expect this overall pattern to continue, as the largest banks optimize their own scale and scope, with items like Bank of America’s consumer rewards platform continuing to play an important role.

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Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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