I recently discussed why Bank of America (NYSE:BAC) was one of my top blue chip top picks for 2017. The reasons extend beyond just rising interest rates, but extend fat into many other fundamental improvements. However, to understand if my buy call holds water, it comes down to performance. We need data and evidence to support the call. Frankly, comparing the last few years of data, the improvement is simply mindblowing. With that notion, Bank of America, as well as other large banks, are out with key earnings reports. This matters for the 2017 call and it matters for the share price which has skyrocketed since the November elections. When I talk about performance I don’t just mean on the top and bottom lines but also in several key metrics that I follow closely for all major banks. Can you stick with the name? We need to examine the company’s most recent earnings and key metrics to make that determination.
As many of my readers are aware, I am most concerned about a growing loan and deposit record, a decent efficiency ratio, as well as of course revenues and earnings. But on top of that, we also need to be aware of toxic or non-performing assets. Why? These metrics can give us an indication of where the bank is heading, and can help us separate the strong from the weak in the sector. As for the major metrics, I am not looking for major growth. While it is true that it will benefit from rising rates, slow and steady growth is most desirable from a bank of this size. That is what I look for. So just how is the company doing?
In the most recent quarter, the bank saw a top and bottom line number that beat analyst estimates. The quarter was strong overall. Revenue was $22.2 billion, up 6.8% year-over-year. It was nice to see this stronger than average rise in revenue. With this rise, the company trounced analyst estimates by $590 million. That caught me by surprise, pleasantly. However, expenses were well managed and as such the company also saw a bump in earnings. Last year, the company saw earnings per share of $0.28 per share, or $3.5 billion. Here in the present quarter net income jumped to $4.9 billion and earnings per share increased 46% to $0.41. I will point out that this was a nice beat versus expectations of $0.06. Of course, the headline numbers only tell part of the story, so what drove these results?
Of course the answer lies in the bank’s net interest income and non-interest income, two of the biggest sources of cash for the company. Net interest income was $11.1 billion up 5% from last year’s comparable quarter. Non-interest income was also year-over-year helping revenues crush estimates. It came in at $11.2 billion net, rising 9%. On a real positive note, another 1.2 million credit cards were issued, which bodes well for future potential interest income as well as fees generated from the card. It is also important to note that spending on credit cards was up 5%.
I still cannot understand why so many experts write off the efficiency ratio. Seriously, I cannot understand it. Maybe it feels like finance 101 again, or something, as it is an elementary metrics, but nonetheless significant. This all important metrics measures the costs expended to generate a dollar of revenue. The efficiency ratios in most of the business segments improved year-over-year. The highest efficiency was in Global Banking, where the ratio was 43%. The worst ratio was in Global Wealth and Investment Management, where it was 73%. Still, the metrics are improving as a whole, and as a bank it was down to 66%, improving from 70.5% last year. There is much work to be done, but this is the strongest Q1 we have seen in years on this metric. That is solid evidence in favor of my thesis long-term on the name.
When you think of your local bank, what do you think of? For me it’s a place for making deposits and getting loans. Well, Bank of America is still a bank so we need to see loan and deposit growth. On this front, the bank is doing well. Loans were up in most categories and came in at $915.7 billion in the quarter, which is down a tick, from the sequential quarter. This was primarily due to declines in Global Market loans. This was the only blemish on an otherwise spotless quarter. Turning to deposits, total average deposits were up year-over-year. They rose to $1.27 trillion in Q1 2017, from $1.21 trillion last year.
Finally, we need to be aware of non-performing assets. This is an area that Bank of America has quietly cleaned up its act. What do I mean? Over the last few years the company has significantly cut into its toxic assets. I was pleased to see that non-performing loans decreased once again to $7.64 billion, down from $8.08 billion last quarter and down from almost $9.3billion in Q1 2016.
All things considered, the key metrics are solid. With interest rates rising into the future, it can only help net interest income longer-term. The largest banks stand to gain and Bank of America is atop the list. The improvement in the bank in just the last few years has been simply mindblowing. I am pleased with the improving efficiency ratio, which I will be watching very closely this year as it could finally dip under 60%. The declining non-performing assets is only positive. I maintain a buy rating on Bank of America for the long-term.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.