Bank of America Earnings Are Better Than Expected: Here’s My Plan
On Monday morning, the country’s second-largest bank released the company’s first-quarter financial results. These results seem to be a little better than some had expected after seeing the report from several competitors last week. For the period ended March 31, Bank of America (BAC) posted GAAP EPS of $0.80 ($7.1M net income), down (-7%) from $0.86 for the prior year period, but beat Wall Street by about six cents. This came on revenue generation of $23.2 billion. This line was good enough for 1.7% year-over-year growth and also beat Wall Street expectations.
Net interest income increased $1.4 billion to $11.6 billion (+13%), driven by deposit growth, loan growth and higher long-term interest rates. Non-interest revenue unfortunately fell 8% to $11.7 billion, due to lower investment banking revenue. Average deposits increased 13% to $2,000,000, while average loan and lease balances increased 8% to $978,000,000, and average global sources of liquidity increased 11% to reach $1.1T. BAC posted a provision of just $30 million for credit losses. Between 400 and 500 million dollars were expected by Wall Street. The bank also released net reserves of $362 million, in stark contrast to JP Morgan’s (JPM) $1.46 billion provision for credit losses, which included a $902 million addition to its reserves for credit losses.
Additionally, Bank of America returned $4.4 billion to shareholders through dividends and share buybacks. The bank’s return on average tangible common shareholders’ equity (ROCE) ratio was 11%, while the return on average tangible common shareholders’ equity (ROTCE) reached 15.5%.
Retail banking: Produced a net income of $2.978 billion (+10.9%) out of a total income of $8.813 billion (+9.2%). Average deposits rose 14% to just over $1.056 billion. Average loans and leases fell 2% to $384 billion. Consumer investment assets increased 10% to $358 billion. Combined credit/debit card spending jumped 15% to $26 billion (credit cards: +25%, debit cards: +9%).
Global Wealth and Investment Management: Produced $1.134 billion (+28.4%) in net revenue on total revenue of $5.476 billion (+10.2%). Total customer balances increased 7% to $3.7T thanks to customer inflows and rising market valuations. Average deposits increased 18% to $385 billion. Average loans and leases increased 12% to $211 billion.
World Bank : Production of $1.724 billion (-20.7%) on total revenues of $5.194 billion (+12.1%). Average deposits increased 11% to $540 billion. Average loans and leases increased 9% to $359 billion. Total investment banking fees fell 35.9% to $1.5 billion.
Global Markets: Produced net revenue of $1.595 billion (-22.3%) out of total revenue of $5.292 billion (-14.6%). Sales and trading revenue fell 7% to $4.7 billion. Fixed income revenue fell 19% to $2.7 billion, while equity revenue rose 9% to $2 billion. Investment banking fees increased from $1 billion to $600 million.
The bank said it had no significant direct exposure to Russia. The bank has approximately $700 million in loans and counterparty exposure. All of these loans were downgraded and reported with increased provision coverage during the quarter.
On credit quality
Net expense fell from $823 million in the prior year period to $392 million, causing the net expense ratio to drop from 0.37% to 0.16%. Non-performing loans and leases fell from $5.162 billion a year ago to $4.625 billion. This in turn caused the ratio of non-performing loans and leases to fall from 0.58% to 0.47%. The company’s provision for loan and lease losses increased from $16.168 billion to $12.104 billion, increasing the loan and lease loss provision ratio from 1.8% to 1.23%.
Readers most likely know that I am currently long on two banks, Wells Fargo (WFC) which did not have a good quarter overall, and Bank of America which posted a quarter I am happy with. The reason I chose these two banks over the others is simple. They both do more domestic business than some of their competitors and that’s a bright spot in 2022. They also rely more heavily on traditional banking as a means of doing business (though certainly not entirely in the case of BAC) than most competitions. This puts more emphasis on the ability to generate net interest income at a time when long-term interest rates are rising and the environment looks less attractive for businesses that generate non-interest income. , such as investment banking and trading.
I placed a Fibonacci retracement pattern on BAC’s performance back to last July’s lows. Even though most patterns do not include the 23.6% and 78.6% retracement levels, I have drawn them for you at $46.90 and $39.42, respectively. Readers can see here that BAC has retraced almost 100% of the rally from July 2021 to February 2022.
While this release was solid and I continue to love the name, I wouldn’t be surprised to see these shares complete the round trip 100%. I will be a buyer up to $36.50. Then we’ll take a look. Remember that BAC pays shareholders $0.84 per share annually, in quarterly installments. That’s good for a 2.24% return.
– Target price: $51
– Pivot: $43 (50 days SMA)
– Add: up to $36.50 (July 2021 low)
– Panic: $35 (-8% from current level)
Risk averse business idea (minimum lots)
– Buy 100 shares of BAC at or near the last sale ($38.33).
– Sell (write) a $42 call from BAC on August 19 for about $1.30.
– Net basis: $37.03
Ok with more risk?
– Sell (write) a BAC on August 19 $37 put for around $2.20.
– The net basis becomes: $34.83
– Best case? Acquired in August for a profit of 20.6%.
– Worst case? Long 200 shares at a net basis of $35.92 in August with BAC trading below $37.
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