Bank of America Earnings Disappoint, Stock still a Buy

BAC-logoBank of America (BAC) today reported first quarter 2015 net income of $3.4 billion, or $0.27 per diluted share and revenue of $21.42 billion. Analysts had predicted earnings of $0.29 per diluted shares and revenue of $21.51 billion, both missing expectations. Ex-items earnings came in at $0.36 per share, beating analyst expectations. One time items included a $1.0 billion ($0.06 per Share) Annual Retirement-eligible Incentive Cost, and $0.5 Billion ($0.03 per Share) in Charges to Revenue for Market-related Net Interest Income Adjustments.

Although earnings came in below analysts exceptions, Banks of America’s earnings and financials had several bright spots:

  • Deposit Balances increased to a record $1.15 Trillion
  • Originated $17 Billion in First-Lien Residential Mortgage Loans and Home Equity Loans
  • Issued $1.2 Million Net Credit Cards
  • Merrill Edge Brokerage Assets increased 18 Percent from Q1 2014 to $118 Billion
  • Reduced Non-interest Expense by 6 percent from Q1 2014 to $14.3 Billion
  • Credit Quality improved with Adjusted Net Charge-Offs Down 28 percent from Q1 2014
  • Estimated Common Equity Tier 1 Ratio under Basel 3 at 10.3 percent
  • Consolidated Liquidity Coverage Ratio Exceeds 2017 requirements
  • Tangible Book Value per Share increased 7 percent from Q1 2014 to $14.79 per share
  • Book Value per Share increased 4 percent from Q1 2014 to $21.66 per share

CEO Brian Moynihan said “Continuing the trend from last quarter, we saw core loan and deposit growth, higher mortgage originations, and increased wealth management client balances.” Brian also said that “management sees encouraging signs in customer and client activity, with consumer spending increasing and utilization of credit by our commercial customers rising”. He also commended the banks good expense control.

CFO Bruce Thompson said “We continue to strengthen an already strong and liquid balance sheet this quarter”.

Analysts are still bullish on the stock. According to Barron’s article, Citigroup’s Kieth Horowitz and Micheal Cronin think Bank of America is worth buying based on the fact that the “Fed will be raising rates and this will be a preferred vehicle given asset sensitivity and screens cheap”. MKM Partners’ David Trone and Pankaj Chitrakar also believes that the stock has “room to run” because the outlook remains strong. They have at $18 price target on the stock, an upside potential of 15 percent from current levels.

Based on the increase in Tangible Book value to $14.79 and reduced 2016 EPS of $1.45, I have the fair value of Bank of America Stock at $19.65. With the bank trading around $15.70, investors can expect an upside potential of 25 percent.

 

 

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