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Bank of America Corp BAC

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Morningstar’s Analysis

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Economic Moat

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Decent Fourth-Quarter Results for Bank of America

Eric Compton, CFA Senior Equity Analyst

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.

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Company Profile

Business Description

Bank of America is one of the largest financial institutions in the United States, with more than $2.5 trillion in assets. It is organized into four major segments: consumer banking, global wealth and investment management, global banking, and global markets. Bank of America's consumer-facing lines of business include its network of branches and deposit-gathering operations, home mortgage lending, vehicle lending, credit and debit cards, and small-business services. The company's Merrill Lynch operations provide brokerage and wealth management services, as does U.S. Trust private bank. Wholesale lines of business include investment banking, corporate and commercial real estate lending, and capital markets operations. Bank of America has operations in several countries.

Contact
100 North Tryon Street, Bank of America Corporate Center
Charlotte, NC, 28255
T +1 704 386-5681
Sector Financial Services
Industry Banks - Diversified
Most Recent Earnings Sep 30, 2020
Fiscal Year End Dec 31, 2020
Stock Type High Yield
Employees 211,000

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