Company Reports

Wide-moat-rated Bank of America reported first-quarter adjusted earnings per share of $0.83, higher than the FactSet consensus estimate of $0.76 per share. The first-quarter results of banks were impacted by an FDIC special assessment charge of $0.7 billion for uninsured deposits of certain failed banks that reduced earnings by $0.07 per share. The first-quarter numbers, after adjusting for the FDIC charge, resulted in a return on tangible equity of 13.8%. We do not plan to materially change our $38 fair value estimate for Bank of America as we fully incorporate the first-quarter results.

After years of issues following the financial crisis of 2008, Bank of America has emerged as one of the preeminent US banking franchises. The bank has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four US credit card issuer, is a top three US acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading US brokerage and advisor firms.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Wide-moat-rated Bank of America reported fourth-quarter earnings per share of $0.35, lower than the FactSet consensus estimate of $0.53. Results were affected by an FDIC special assessment of $2.1 billion for uninsured deposits of certain failed banks, which reduced EPS by $0.20, and a noninterest income charge of $1.6 billion as a result of the cessation of the Bloomberg Short-Term Bank Yield Index, which reduced earnings by $0.15 per diluted common share. Excluding the nonrecurring charges, reported EPS came in at $0.70, largely in line with our expectations.

After years of issues following the financial crisis of 2008, Bank of America has emerged as one of the preeminent U.S. banking franchises. The bank has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four U.S. credit card issuer, is a top three U.S. acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading U.S. brokerage and advisor firms.

Wide-moat-rated Bank of America reported decent third-quarter results. Deposit costs are tracking as we expected, deposits grew slightly in the quarter, and net interest income, or NII, even outperformed slightly despite minimal balance sheet growth. After some slight changes to our projections, we are maintaining our fair value estimate of $35 for Bank of America. We think the market is continuing to penalize Bank of America for its longer duration securities, and while it will be slow going for this book to gradually mature and roll off, we think the core business remains solid. We still view shares as moderately undervalued, being slightly cheaper than peer JPMorgan but not quite as cheap as the peers in turn-around mode.

After years of issues following the financial crisis of 2008, Bank of America has emerged as one of the preeminent U.S. banking franchises. The bank has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four U.S. credit card issuer, is a top three U.S. acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading U.S. brokerage and advisor firms.

Wide-moat-rated Bank of America reported second-quarter earnings per share of $0.88, beating the FactSet consensus of $0.84 and our own estimate of $0.73. The beat was primarily attributable to higher net interest income and trading results. The bank gave its first full-year guidance for NII: a little above $57 billion (on a fully taxable equivalent basis), which is a bit better than we had forecast.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

The acquisitions of shaky investment bank Merrill Lynch, shady mortgage lender Countrywide Financial, and the equally dysfunctional MBNA led to a decade of troubles for Bank of America. The bank had to spend billions of dollars to settle legal and regulatory issues, and it took years to reshape the business and work through the credit losses. With all of this behind it, Bank of America has emerged as one of the preeminent U.S. banking franchises. The bank now has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four U.S. credit card issuer, is a top three U.S. acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading U.S. brokerage and advisor firms.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Wide-moat-rated Bank of America reported decent first-quarter results, showing that the bank’s deposit base and funding costs are tracking roughly as would have been expected, even before the Silicon Valley Bank implosion. The bank does not provide full-year net interest income, or NII, guidance, but guidance for the second quarter was roughly in line with previous expectations, with NII expected to decline by roughly 2% sequentially. If rate cuts occur during the second half of 2023, we would expect NII to grind even lower in the third and fourth quarters.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

The acquisitions of shaky investment bank Merrill Lynch, shady mortgage lender Countrywide Financial, and the equally dysfunctional MBNA led to a decade of troubles for Bank of America. The bank had to spend billions of dollars to settle legal and regulatory issues, and it took years to reshape the business and work through the credit losses. With all of this behind it, Bank of America has emerged as one of the pre-eminent U.S. banking franchises. The bank now has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four U.S. credit card issuer, is a top three U.S. acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading U.S. brokerage and advisor firms.

Wide-moat-rated Bank of America reported fourth-quarter earnings of $0.85 per share, ahead of the Factset consensus of $0.77 but below our own estimate of $0.92. The main difference between our estimates and Bank of America’s results was expenses, which came in 3% above our expectations. Management updated its net interest income, or NII, guide for the quarter several weeks ago, lowering its outlook by roughly $350 million. Provisioning was also slightly above our forecast.

The acquisitions of shaky investment bank Merrill Lynch, shady mortgage lender Countrywide Financial, and the equally dysfunctional MBNA led to a decade of troubles for Bank of America. The bank had to spend billions of dollars to settle legal and regulatory issues, and it has taken years to reshape the business and work through the credit losses. With all of this behind it, Bank of America has emerged as one of the pre-eminent U.S. banking franchises. Bank of America now has one of the best retail branch networks and overall retail franchises in the United States, is a Tier 1 investment bank, is a top four U.S. credit card issuer, is a top three U.S. acquirer, has a solid commercial banking franchise, and owns the Merrill Lynch franchise, which has turned into one of the leading U.S. brokerage and advisor firms.

Wide-moat-rated Bank of America reported third-quarter earnings of $0.81, roughly in line with the Factset consensus of $0.78 and just below our own estimate of $0.88. The main difference between or own estimates and Bank of America’s results were expenses, which came in 4% above our expectations. A legal charge in the quarter accounted for roughly half of this difference. Top-line revenue on a reported basis came in at $24.5 billion, in line with our own estimate of $24.4 billion and above consensus of $23.5 billion.