Pressures Build Behind Bank of America's Q4 Results

Bank of America BAC reported solid fourth-quarter earnings per share of $0.82, beating FactSet consensus of $0.77, and our own estimate of $0.59. The beat was largely attributable to additional reserve releases. Top-line revenue on a reported basis came in at $22.1 billion, slightly behind our estimate of $23.1 billion, with net interest income coming in stronger than we expected, while fees were down roughly 9% sequentially, a bit weaker than we expected.

On the expenses front, we were hoping for a marginal expenses decrease in 2022, but management expects relatively flat expenses in 2022. Compared with peers who are seeing mid-single-digit growth from inflationary pressure, this may seem like a great result, however expenses in 2021 were already a material step up from the previous expense trajectory. In other words, we think behind the scenes there is some inflationary pressure feeding through.

Not unsurprisingly (because the bank uses rate shocks compared with the forward curve) the bank’s estimate rate sensitivity dropped, going to $6.5 billion from $7.2 billion. This is still a good level of rate sensitivity, all things considered. Based on our initial read, and due to our updated tax rate assumptions, we expect we will raise our fair value estimate for Bank of America by roughly 13%, subject to change as we digest details from the upcoming earnings call. This would put our fair value estimate close to $43 per share, still below the current market price of $47. We think excitement about rate expectations has led investors to bid shares up, leaving little margin of safety.

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