Bank of America Earnings: Loan Growth Powers Solid Quarter

Key Morningstar Metrics for Bank of America

• Fair Value Estimate: $46.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Bank of America’s Earnings

Bank of America BAC reported solid numbers in the second quarter with earnings of $0.89 per share, equating to a return on tangible equity of 13.4%, powered by loan growth and higher net interest income. NII is expected to continue inching upward in the coming quarters, supporting profit growth.

Why it matters: NII will remain a key monitorable for the bank, as it benefits from the repricing of long-duration loans and securities, which are currently earning low yields. Management forecasts that repricing of these assets should lead to a $450 million boost to NII in the next two quarters.

• Higher NII from repricing and balance sheet growth would be partially offset by the impact of lower interest rates. On a net basis, we expect the bank’s NII to grow at the fastest clip compared with its peers because of its unique balance sheet dynamics.
• An improvement in NII has substantial implications for the profitability of the bank, given the higher operating leverage associated with it. A pickup in loan growth in recent quarters is another positive for the bank’s NII and profitability trajectory.

The bottom line: We are increasing our fair value estimate for wide-moat Bank of America to $46 per share from $43 after incorporating second-quarter results.

• The increase is a result of the time value of money, higher balance sheet growth in the long term, and a slightly better near-term NII trajectory due to a pickup in loan growth. Shares reacted negatively to results due to slightly higher expenses, but our FVE is based on our long-term outlook.

Key stats: Management projects that the bank will exit the year with a quarterly NII of around $15.6 billion at the midpoint, from $14.8 billion currently.

• Loans grew about 3% on a sequential basis, with most of the growth coming from commercial loans. Higher commercial loan growth is welcome news for investors, but some of the pickup in growth appears to be driven by temporary factors.