Bank of America Earnings: Meeting Expectations, Net Interest Income Likely to Bottom Soon

Key Morningstar Metrics for Bank of America

• Fair Value Estimate: $35.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Bank of America’s Earnings

Bank of America BAC 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.

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 mature and roll off, we think the core business remains solid. We still view shares as moderately undervalued, being slightly cheaper than JPMorgan Chase JPM, but not quite as cheap as its peers in turnaround mode.

Management maintained its fourth-quarter NII outlook and believes next quarter will roughly be the bottom for NII in the current cycle, assuming there’s no more than one additional interest rate hike from the Federal Reserve. We think the market is still getting comfortable with where funding costs, deposit levels, and NII might reach an equilibrium, and we are starting to get a more refined picture here. This should set up the bank for a slight decline in NII in 2024, although NII levels should still be roughly 30% above where they were in 2020 and 2021. In other words, despite some of the self-induced pressure from the bank’s longer-duration securities portfolio, profitability is not an issue, and its current trajectory roughly fits our previous expectations.

Expenses met expectations, and management maintained its outlook for the fourth quarter. We think it will be difficult but possible for the bank to limit expense growth in 2024. We are currently expecting something closer to a mid-single-digit percentage increase, but there may be room for something better.

Fees were a bit weaker, as investment banking did not bounce back in the quarter. This remains a cyclical business, and we would not read too much into this. Other fee items were roughly as expected.