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Bank of America posts mixed results for Q4; Should investors by a dip?

AInvestFriday, Jan 12, 2024 11:13 am ET
2min read

Introduction:

This article presents an analysis of Bank of America's (BAC) recent earnings report, highlighting its financial performance and providing insights into key metrics. Despite a decline in net income and revenue, the bank showcased resilience amidst challenges, while demonstrating potential areas of growth and improvement.

Earnings Report Overview:

Bank of America's earnings report for the fourth quarter reflected a decrease in net income and revenue compared to the previous year. However, the bank's ability to manage credit risks, improved sales and trading revenue, and maintain healthy capital ratios showcased its resilience in a volatile market environment.

Net Income and Diluted Earnings per Share:

Bank of America reported a net income of $3.1 billion, or $0.35 per diluted share, for the fourth quarter, representing a significant decrease from $7.1 billion, or $0.85 per diluted share, in the same period of the previous year. Adjusted net income for the quarter was $5.9 billion, with adjusted diluted earnings per share of $0.70. Although the decline in net income is notable, it is important to evaluate other factors impacting the bank's performance.

Revenue and Noninterest Income:

Bank of America reported a decline in revenue, net of interest expense, of $2.6 billion, or 10% compared to the previous year. However, when excluding the impact of BSBY cessation, adjusted revenue decreased by 4%. Noninterest income also decreased by $1.8 billion to $8.0 billion, with adjusted noninterest income declining by $264 million. Factors contributing to the decrease in revenue and noninterest income include higher deposit costs, lower deposit balances, and weaker trading in rates and credit.

One of the significant contributors to the bank's revenue was its Consumer Banking segment, which reported a net income of $2.8 billion. The revenue decreased by 4% to $10.3 billion, primarily due to lower deposit balances. The provision for credit losses in this segment was $1.4 billion, resulting in a net reserve build of $382 million in Q4 2023.

BofA's asset growth over the year was evident, with total assets increasing from $3,051.4 billion on December 31, 2022, to $3,179.9 billion on December 31, 2023. The total loans and leases saw a marginal increase from $1,049.1 billion to $1,053.7 billion. However, total deposits decreased from $1,930.3 billion to $1,923.8 billion over the year.

Sales and Trading Revenue:

Bank of America's sales and trading revenue demonstrated resilience, increasing by 3% to $3.6 billion, inclusive of net debit valuation adjustment (DVA) losses of $132 million. Excluding net DVA, sales and trading revenue grew by 1% to $3.8 billion. The Fixed Income, Currencies, and Commodities (FICC) revenue decreased by 4%, primarily due to weaker trading in rates and credit. However, Equities revenue displayed strong performance, increasing by 13%, driven by improved trading performance in derivatives.

Credit Losses and Provisions:

The bank's charge-offs increased from $1.0 billion to $1.2 billion, driven primarily by higher credit card losses. The total net charge-offs increased by $261 million from Q3 2023, with consumer net charge-offs rising by $109 million and commercial net charge-offs increasing by $152 million. The net charge-off ratio increased by 10 bps from Q3 2023.

Despite the challenges, BofA maintained a strong capital position with a CET1 ratio of 11.8%, 181 bps above the regulatory minimum effective January 1, 2024. The return on average common shareholders' equity (ROE) ratio was 4.3%, while the adjusted ROE was 8.6%. The return on average tangible common shareholders' equity (ROTCE) ratio was 5.9%, with an adjusted ROTCE of 11.7%.

Price Action:

Shares of BAC rallied from $26 at the start of November to $33 ahead of this report. The results leave a little to be desired and are leading investors to bank some profits. The pullback is minimal and the stock continues to look attractive as it trades below peers at 1.0x price to book. We would view a pullback as a good entry for investors with a longer-term holding period. 

In conclusion, BofA's Q4 2023 earnings report reflects a challenging environment with mixed results. The bank's strong capital position, coupled with a focus on maintaining a diverse revenue stream, will likely position it well to navigate the ongoing economic uncertainty. Investors should keep a close eye on the bank's ability to manage rising credit costs and interest rate volatility in the coming quarters.

$BAC(BAC)


Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.