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BofA's (BAC) Q2 Earnings Top on Investment Banking, Loans

Higher investment banking fees as well as loan growth drove Bank of America Corporation’s BAC second-quarter 2017 earnings of 46 cents per share, which outpaced the Zacks Consensus Estimate of 43 cents. Results included $103 million of after-tax gains related to the sale of its non-U.S. consumer credit card business. The figure was 12% higher than the prior-year quarter.
Nonetheless, markets don’t seem to be happy with BofA’s results. In  pre-market trading, the company’s shares were down nearly 1.1%. Sequential decline in net interest margin (owing to lower treasury yields during the quarter) and decline in mortgage banking fees were perhaps the reasons for the bearish stance. The price reaction during the full trading session will provide a better picture about how the investors accepted the results.

Further, a slight rise in expenses and fall in trading revenues (as expected) acted as headwinds. However, increase in investment banking fees more than offset these and partially aided fee income growth during the quarter. The quarter witnessed modest loan growth, which helped in improving interest income. Additionally, provision for credit losses recorded a fall.

Also, overall performance of the company’s business segments, in terms of net income generation, was decent. All segments witnessed improvement in net income except Global Markets.

Loan Growth Supports Revenue, Expenses Rise Marginally

Net revenue amounted to $23.1 billion, up 7% from the prior-year quarter. Also, the top line beat the Zacks Consensus Estimate of $21.9 billion.

Net interest income, on a fully taxable-equivalent basis, grew 9% year over year to $11.2 billion. Further, net interest yield rose 11 basis points (bps) year over year to 2.34%.

Also, non-interest income rose 6% from the year-ago quarter to $11.8 billion. The increase reflected higher investment banking fees, partially offset by decline in trading income and mortgage banking income.

Non-interest expenses were $13.7 billion, up 2% year over year. The figure includes the impact of impairment charges related to certain data centers in process of being sold and higher severance.

Credit Quality Improves

As of Jun 30, 2017, ratio of nonperforming loans, leases and foreclosed properties was 0.78%, down 20 bps year over year. Further, net charge-offs dropped 8% from the year-ago quarter to $908 million, indicating lower losses in consumer real estate.

Also, provision for credit losses fell 26% year over year to $726 million, reflecting lower losses in consumer real estate and lower in energy exposures.

Strong Capital Position

The company’s book value per share as of Jun 30, 2017 was $24.88 compared with $23.71 as of Jun 30, 2016. Tangible book value per share as of Jun 30, 2017 was $17.78, up from $16.71 as of Jun 30, 2016.

As of Jun 30, 2017, the company’s common equity tier 1 capital ratio (Basel 3 Transition) was 11.5%.

Our Take

Impressive performance in investment banking continued. BofA’s efforts to realign its balance sheet and focus on core operations will likely support bottom-line growth. Further, the bank is well positioned to benefit from higher interest rates.

As expected, fixed income and equity trading declined. Further as interest rates move higher, mortgage refinancing is expected to continue falling.

Currently, BofA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Major Banks

Rising interest rates and loan growth drove JPMorgan Chase & Co.’s JPM second-quarter 2017 earnings, which handily outpaced the Zacks Consensus Estimate. Also, results were supported by a fall in provision for credit losses, rise in investment banking fees, loan growth and higher interest rates. However, a rise in operating expenses, decline in trading revenues and lower mortgage banking income were the headwinds.

Driven by interest income, Wells Fargo & Company’s WFC second-quarter 2017 earnings outpaced the Zacks Consensus Estimate. The company witnessed organic growth aided by strong loans and deposit balances. However, higher expenses and lower non-interest income were concerns.

Citigroup Inc. C delivered a positive earnings surprise of 5% in second-quarter 2017, riding on higher revenues. However, higher expenses and an increase in cost of credits were the headwinds.

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