Bank of America Corp (NYSE:BAC) disclosed its financial numbers for the three-month period January – March most recently and that was either in line with the Street analysts’ expectations or fell shy of some analysts’ predictions. However, the stock witnessed growth in the price after the financial results. It was obviously a testimony to the fact that the stock remains attractive. In fact, among the big four banks, this is the only stock available cheap and could have the potential to witness higher growth rate than the others. As far as the company is concerned, it believes it delivered solid improvement in earnings in four out of business divisions apart from some key metrics. While asset quality remains strong, the company managed its expenses very well so as to continue to invest in the business. Let’s look at some of the positives.
Enhanced Earnings
Bank of America Corp (NYSE:BAC) delivered 16% growth in the bottom line. That was possible because of the improved performance of its four out of five divisions. For instance, its consumer banking delivered $1.785 billion net profit, up 21.8% from $1.461 billion in the previous year quarter. Similarly, its GWIM segment delivered 13.5% higher profit in the first quarter at $740 million than $652 million. However, the company faced tremendous pressures in its Global Banking division as its profit dropped 22.0%. Its profit fell to $1.066 billion from $1.367 billion. The results might suggest the pressures from the segment, and the company needs to face the pressures to bring it to growth rate.
The strong growth in net income for Bank of America Corp (NYSE:BAC) came from its Global Markets division. The segment’s profit jumped 45.4% to $984 million from $677 million. Another key area was that Legacy Assets and Servicing where the company did well to limit the losses to $40 million in the latest quarter than $237 million suffered in the preceding year period. If the bottom line performed creditably, it was because of two reasons. One is the improvement in the operational side and the other is the enhanced revenue generation from the top line from those segments. That meant those segments are doing pretty well. Therefore, the focus should be on improving the performance of the division and turning to profit in LAS segment.
Balance Sheet Strengthened
In the last five years or so, Bank of America Corp (NYSE:BAC) has improved its balance sheet tremendously. The bank has strengthened its capital of TCE ratio to 7.9% at the end of the first quarter from 5.0% in the fourth quarter of 2009. Similarly, it built a record liquidity during the same period. Global Excess Liquidity Sources more than doubled to $525 billion from $214 billion at the end of the year 2009. This will ensure that even if there is a crisis, it could manage very well the crisis. The lesson learnt from the early crisis is still fresh in the memory and no one wants to take to chances, including the Federal Reserve.
Another important factor for Bank of America Corp (NYSE:BAC) is the enhanced funding structure. The company reduced its dependence on its long-term debt by 55.5% in the same period. At the end of the first quarter, its exposure to long-term debt was only $233 billion while it was $523 billion at the end of the year 2009. The bank boosted its deposits by 22.7% to $1.22 trillion at the end of the first quarter from $992 billion in 2009 end. This has twin benefits. One is gaining the confidence of the public in attracting deposits and the other is reducing debt costs. That would only strengthen the balance sheet.
Credit Card Unit Growth
Bank of America Corp (NYSE:BAC) could count upon the continued growth of its credit card business as it adds over a million accounts every quarter with a risk-adjusted margin of over 9%. The interesting point was that the card spending witnessed 5% growth in the March quarter. The new accounts are expected to enable the bank to collect more interest fees on their future spending. Aside from that, there would be more income from the transactions, which is good for the company as the unit is one of the fast growth driving forces for the company. Therefore, its focus on the card business would only add value to its income.
Another interesting factor is that Bank of America Corp (NYSE:BAC) is trying to shrink its LAC business considerably. If any investors take a close look at the segment, it was quite clear that the unit has become a small thing. That meant that the losses suffered in the past would soon become a thing of the past in the division. For instance, at the end of the year 2015, LAS, excluding litigation, was only $3.6 billion compared to $9.8 billion in 2011.
Cost Saving Measures
In the absence of interest rate hike, the financial institutions were left with no alternatives but to focus on saving their expenditures. One of the prime factors that affected most of the banks was the litigation charges or the settlement charges. That has now become a small part than the earlier allocation of funds. That was also reflected in the financial results of Bank of America Corp (NYSE:BAC). For instances, it was able to conserve expenditures by as much as 30% on YOY basis. The overall expenditures dropped to $57.7 billion in 2015 from $77.1 billion in 2011. The company also completed its $8 billion annualized cost saving programs in the third quarter of the year 2014. Now, the focus is on simplifying and improving.
Conclusion
Of the four big banks, Bank of America Corp (NYSE:BAC) is yet to catch up with other banks as far as the stock performance is concerned. Most of the troubles related to crisis are over now and there is less threat of inviting any fresh charges. Also, the company’s dependence has become balanced. For instance, it has balanced portfolio of corporate and retail. The interest rate hike is expected in June and that should also help it. Therefore, buying the stock at the current levels could prove to be beneficial in the long-term.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.