Bank of America Earnings: NIM Expansion, Fee Growth, and Operating Leverage Drive a Standout 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 excellent numbers for the third quarter, with earnings of $1.06 per share, equating to a return on tangible equity of 15.4%, powered by net interest margin expansion, solid fee income growth, and positive operating leverage dynamics playing out.

Why it matters: Third-quarter results verify our NIM expansion thesis for the bank. Net interest income will remain an important profitability driver for the bank as it benefits from the repricing of long-duration loans and securities, which were earning low yields.

• Most of the incremental contributions from NIM expansion flow directly to the bottom line in the near term, as it has no directly associated expenses. The bank underperformed its peers because of this dynamic in recent years, but it is now set to outperform its peers in the coming years.
• NIM was reported at 2.01% in the quarter, up 9 basis points from 1.92% in year-ago quarter. NII grew by 9.2% on a year-over-year basis, driven by NIM expansion and 4.2% growth in average interest-earning assets.

The bottom line: We plan on maintaining our $46 fair value estimate for wide-moat-rated Bank of America after incorporating these results.

• We think large US banks are trading in overvalued territory, but on a relative basis, Bank of America remains our preferred pick. The bank is well-positioned for strong EPS growth in the upcoming years, and it has the biggest potential to surprise on the upside.

Key stats: Average loans grew by an impressive 9% year over year and 2% sequentially, with the biggest growth coming from the global markets segment. We expect loan growth to remain solid in the next couple of years.

• Fee income growth remained solid, with trading revenue growing at 9%, investment banking revenue growing 43% and asset management growing 12% on a year-over-year basis.