Lower operating expenses and negligible legal costs drove Bank of America Corporation’s BAC third-quarter 2015 earnings of 37 cents per share, surpassing the Zacks Consensus Estimate of 34 cents. Further, the bottom line witnessed a significant improvement from net loss of 4 cents incurred in the prior-year quarter.
Notably, a legal charge of $231 million was included in the quarterly results.
BofA’s shares jumped nearly 2.5% in pre-market trading, which, we believe, depicted investors’ optimism regarding continued fall in legal expenses as well as success of its cost-saving plan. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.
As anticipated, strained revenues dampened the bottom-line growth to some extent. Weakness in fixed income trading and lower equity investment income were the undermining factors. Also, a rise in provision for loan losses added to the concerns.
Nevertheless, BofA’s success story was driven by ‘expense control’. Also, a rise in mortgage banking income, asset management fees and card fees marginally supported the results.
Further, overall performance of the company’s business segments, in terms of net income generation, was encouraging. All segments, other than Global Wealth and Investment Management, witnessed year-over-year improvement in net income.
Reduced long-term debt, attributable to maturities and improved funding costs, also featured among the positives.
Details
Net revenue amounted to $20.7 billion, down 2% from $21.2 billion recorded in the prior-year quarter. The top line met the Zacks Consensus Estimate.
Net interest income, on a fully taxable-equivalent basis, fell 7% year over year to $9.7 billion. Fall in consumer loan balances, lower yields and unfavorable impact of market-related adjustments led to the decrease.
Further, net interest yield fell 19 basis points (bps) year over year to 2.10%.
Non-interest income grew 2% year over year to $11.2 billion. The rise was attributable to higher mortgage banking, card income, asset management fees and other income. However, these were partially offset by a fall in capital markets revenue and equity investment income.
Non-interest expense was $13.8 billion, dropping 31% year over year. Moreover, non-interest expense, excluding litigation costs, fell 4% year over year to $13.6 billion. The decline reflected success of the company’s aggressive cost-containment measures and continued progress of Legacy Assets and Servicing cost initiatives.
The company’s book value per share as of Sep 30, 2015 was $22.41, compared with $20.99 as of Sep 30, 2014. Tangible book value per share as of Sep 30, 2015 was $15.50, up from $14.09 at the end of the year-ago quarter.
Credit Quality
Credit quality depicted mixed results during the quarter. As of Sep 30, 2015, ratio of nonperforming loans, leases and foreclosed properties was 1.17%, down 44 bps year over year. Further, net charge-offs fell 11% to $932 million.
However, provision for credit losses surged 27% to $806 million. This was owing to slower pace of release reserves and lower level of loan sale recoveries.
Capital Ratios
As of Sep 30, 2015, the company’s common equity tier 1 capital ratio (Basel 3 Transition) was 11.6%, up from 11.2% as of Jun 30, 2015. Tangible common equity ratio was 7.8%, compared with 7.2% as of Sep 30, 2014.
Our Viewpoint
For BofA, 2015 began on a positive note with no significant legal issues cropping up. Therefore, the company, free from large litigation hassles, is back on the growth track.
Further, BofA has been focusing on cost-containment measures, apart from realigning its balance sheet in accordance with regulatory changes. Also, with steady economic recovery, we believe the company will be able to improve its top line, supported by sustained growth in loans and deposits.
However, a still low rate environment remains a near-term concern, exerting strain on revenue growth. Moreover, litigation and various regulatory issues will continue to hurt BofA’s results, but the magnitude of outflow related to these will gradually lessen going forward.
Currently, BofA carries a Zacks Rank #3 (Hold).
Among other Wall Street banks, JPMorgan Chase & Co. JPM has already come out with third-quarter 2015 results, while Wells Fargo & Co. WFC released its results along with BofA. Citigroup Inc. C is slated to report on Oct 15.
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