Summary
- Armed with a strong earnings report, Bank of America has eased my near-term concerns about the financial services space.
- While consumer banking was already expected to perform well, I was impressed by solid execution on the institutional side.
- In the context of a balanced portfolio that holds stocks across all sectors, I believe BAC is a name worth considering.
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So much for a tough third quarter. On October 16, Bank of America (BAC) delivered pristine 3Q19 results that did not reflect my worries over a challenging earnings season for U.S.-based banks.
Revenues of $22.8 billion did not grow much YOY only due to one-off gains on equity investments last year, but beat consensus estimates by a solid $225 million. Meanwhile, EPS of $0.75 adjusted for JV impairment topped expectations by seven cents, one of the highest earnings beats delivered by the Charlotte-based bank since 2015.
Credit: Bankrate
Not all about the consumer
Bank of America's performance was consistent with the strong results delivered by peer JPMorgan (JPM) one day earlier - the stock of these two companies have been my top picks in the banking sector for about two years. Strength did not come only from retail banking, which was widely projected to benefit from healthy consumer activity, particularly in the United States. Instead, virtually all of Bank of America's sub-segments looked pretty solid in the third quarter (see charts below).
I was particularly pleased to see 8% YOY growth in global banking revenues, a segment that represents nearly one-fourth of Bank of America's total revenues. Generally speaking, I expected banking activity to be pressured in 3Q19 by a confluence of negative factors that included the global trade wars, unresolved Brexit, deteriorated business sentiment and market volatility. Instead, Bank of America executed well enough to capture 80 bps in investment banking fee market share YTD, fighting off the headwinds competently.
Source: DM Martins Research, using data from earnings release
Further down the P&L, non-interest expenses remained under check, with efficiency ratio staying flat at 57% as it has been the case since the second half of last year (see charts below). The company seems to be managing costs well, offsetting some of the necessary investments in technology and personnel with a reduced physical footprint that is consistent with the adoption of digital banking - branch count dropped by 83 YOY, despite the low-to-mid single-digit increase in deposits and loan assets.
