Analyst Note| Eric Compton, CFA |
Wide-moat Bank of America reported decent fourth-quarter earnings, with EPS of $0.59 per share just above the FactSet consensus estimate of $0.55. This equates to a return on tangible common equity of nearly 12% for the quarter. The biggest swing factor, and one we have highlighted in the past, was the bank's provisioning for credit losses. In the current quarter, Bank of America was able to release roughly $800 million in reserves compared with net charge-offs of roughly $900 million, resulting in provisioning of only $53 million during the quarter. Compared with provisioning of roughly $1.4 billion in the third quarter, this was a roughly $0.12 swing in EPS, assuming a 20% tax rate. The possibility of reserve releases occurring had been talked about before the beginning of the fourth quarter, but it is nice to see it actually occurring, as it signals that the banks appear to be very well reserved, which has been our thesis all along. While positive provisioning developments aren't sustainable over the long run, it is worth pointing out that Bank of America, in what was arguably the toughest year for banks since the 2008-09 financial crisis, reported a return on tangible common equity of 9.5% for the full year, still meeting our estimate of the bank's cost of equity. After incorporating the latest results into our long-term projections for Bank of America, we are raising our fair value estimate to $30 per share from $28.