Bank of America Earnings: Strong Fee Revenue and Upbeat Commentary Mark a Solid Quarter

Key Morningstar Metrics for Bank of America

• Fair Value Estimate: $39.50
• Morningstar Rating: 3 stars
• 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 third quarter, as investment banking continues to recover, asset valuations remain buoyant, trading revenue remains strong, and most importantly, the macroeconomic consensus on a soft landing for the economy has strengthened the outlook for the next year. The bank reported earnings per share of $0.81, lower than the $0.90 in the year-ago quarter. The numbers resulted in a return on tangible equity of 12.8%. We maintain our fair value estimate of $39.50 per share as we fully incorporate the results.

Net interest income will remain important for Bank of America as interest rates decline. The bank’s relatively lower asset sensitivity should let it outperform other banks here. NII improved sequentially by about $0.3 billion during the quarter, driven by fixed-rate asset repricing and better results in the global markets segment. Management said the bank’s NII has already bottomed out at $13.9 billion in the second quarter and that it expects NII of around $14.3 billion in the fourth. The bank reported a third-quarter net interest margin of 1.92%, materially lower than our midcycle estimates of 2.30% due to the unique balance sheet dynamics impacting the bank.

The bank reported an efficiency ratio of 65% in the third quarter as expenses increased by about 4% on a year-over-year basis, driven by revenue-related expenses and higher investments in technology. We think that Bank of America has considerable scope to improve its efficiency. For context, the bank’s larger peer JPMorgan Chase JPM is now operating at an efficiency ratio of around 53%, resulting in a massive difference of 12 percentage points.