As earnings season continues, the banking world is buzzing with excitement, as Bank of America Corporation (NYSE: BAC) became the latest bank to shatter expectations in its second-quarter results for fiscal 2023. America’s second-largest bank by assets used the high-interest rate environment as a powerful ally to deliver results that were nothing short of formidable.
Bank of America delivered earnings per share (EPS) of $0.88, up from the prior $0.73, while exceeding the $0.83 consensus. Similarly, their revenue expanded 11% year over year to $25.2Bn, cruising past the $24.94Bn forecast, as high-interest rates and strong organic client growth led to higher activity across their offerings. As a result, the share price spiked over 4%, reflecting the optimism in the consumer’s sentiment toward the bank, recovering swiftly from the uncertainty during the banking crisis earlier this year.
Technical
On the 1D chart, the share price has consolidated in a rectangular range following the sharp downtrend in the year’s opening months. However, the reaction post-earnings could have triggered a range breakout for the formation of a potential uptrend.
From the late-March bottom, the price action has failed to gain significant traction to retrace the downtrend, but the recent bullish uptick has broken through the 38.2% Fibonacci retracement at $30.60. On current momentum, the Fibonacci midpoint and golden ratio are within grasp at $31.83 and $33.06, respectively. A breakout above $33.06 could lead to convergence with the estimated fair value of $34.49, presenting a 12% potential upside from current levels.
However, with the 50-day moving average still ranging below the 100-day moving average, the shorter-term downward momentum could still cause a correction to retest the strength of the uptick at $29.75. If a breakdown occurs at this level, further downside is possible toward $28.54 and $27.61, as near-term economic risks remain present.
Fundamental
The company exceeded its top-line estimates with an 11% revenue expansion to $25.2Bn. Net interest income (NII) unsurprisingly expanded by 14% to $14.16Bn, while non-interest income defied the odds to rise by 8% to $11.0Bn. Non-interest income was boosted by sales and trading revenue, which offset lower service charges and investment and brokerage fees. While most other banks saw a contraction in their investment banking and trading activities, Bank of America stood out with the best opening half of the year that the company has managed in a decade in this sector. Revenue from commodities and currency trading was up 18%, while adjusted sales and trading revenue grew 10% from the prior year’s second quarter. In addition, investment banking fees were up 7% from the last year’s quarter, rounding off the solid performance.
On a segmental basis, Consumer Banking revenue, which accounts for 39% of the company’s top line, realized a healthy 15% expansion to $10.52Bn. Higher interest rates and loan balances accounted for the growth, while lower services charges slightly offset the upside. Global Banking, which contributed 24% of the top line, grew 29% to $6.5Bn, further riding the optimistic NII wave. The third-largest revenue generator was the Global Wealth & Investment Management segment, which continued to feel the pressure with a 4% contraction to $5.24Bn due to lower transaction volumes and fixed income market levels, which weighed on asset management and brokerage fees. However, the Global Markets segment offset the contraction in investment banking with an 8% rise to $4.87Bn, aided by higher sales and trading revenue.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
The company’s liquidity position also remained strong, with global liquidity sources (GLS) reaching $867.3Bn, while total deposits contracted to $1.877 Trillion. With GLS covering a significant portion of its deposit base, it also operates with a healthy CET1 ratio of 11.6%. Total loans and leases rose from $1.03 Trillion to $1.05 Trillion, while provisions for credit losses were $1.13Bn, a significant expansion from the prior $523M. The graph below shows the company’s capital adequacy position compared to its peers. While its core tier 1 capital ratio lags behind JPMorgan, Citigroup, and Morgan Stanley, it remains comfortably above the industry standard, leaving clients assured of the safety of their deposits.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
On top of its healthy capital position, the bank has accumulated a substantial cash pile and a large base of liquid securities to cover potential outflows. They sit with $374Bn in cash, along with $143Bn in available-for-sale securities and $614Bn in held-for-sale securities. The graph below demonstrates its liquidity position relative to its peers. Bank of America is well positioned in the financials sector regarding cash and short-term investments to long-term debt. However, they slightly lag behind JPMorgan, Goldman Sachs, and Citigroup.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
In the conference call, management signalled that the consumer remains healthy, with loan demand steadily growing. As a result, the bank is steadily increasing its net loans/deposits ratio, as shown in the graph below. With healthy loan growth and the potential for interest rates to remain high in the upcoming quarters, Bank of America looks well-positioned to capture additional expansion in NII. Considering that the portion of its loan book comprising nonperforming loans is shrinking, currently at a measly 0.41%, the company may feel comfortable expanding its loan base as we advance. However, the favourable environment that the banks are currently thriving in could be unsustainable, considering the high rates of interest that the economy is now operating in. Additionally, larger banks have benefited from an influx of deposits at the expense of smaller regional banks, which could have also provided an unsustainable tailwind for expansion in the recent quarter.
Source: FairMarkets Australia – Koyfin, Tiaan van Aswegen
Summary
Bank of America released a stellar set of quarterly earnings on Tuesday, reminding investors of its powerful presence in the financial industry. With a strong balance sheet, ample liquidity, and a tailwind from a favourable economic environment, the share price presents a healthy 12% potential upside from current levels if the bullish momentum persists.
Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, Bank of America Corporation
