Why Is Bank of America (BAC) Down 11% Since Last Earnings Report?

A month has gone by since the last earnings report for Bank of America (BAC). Shares have lost about 11% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Bank of America due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

BofA's Q2 Earnings Beat on Loan Growth, Cost Control

Loan growth and higher equity issuances drove Bank of America’s second-quarter 2019 earnings of 74 cents per share, which outpaced the Zacks Consensus Estimate of 70 cents. Also, the figure was up 17% from the prior-year quarter.

The results were mainly driven by strong consumer banking division performance. Net interest income growth (driven by higher rates and decent loan growth) majorly supported the top line. Further, despite taking several initiatives including technology upgrades at existing ATMs and branches, and opening new branches, the company was able to manage expenses efficiently.

As expected, investment banking performance was weak as debt underwriting revenues and advisory fees declined, while equity underwriting fees improved. Additionally, equity and fixed income trading was dismal, leading to fall in sales and trading revenues. Further, card fees and service charges decreased.

Moreover, provision for credit losses increased during the reported quarter.

Overall performance of the company’s business segments, in terms of net income generation, was decent. All segments, except Global Markets and Global Banking, witnessed a rise in net income.

Loan Growth Aids Revenues, Expenses Up Slightly

Net revenues amounted to $23.1 billion, which marginally beat the Zacks Consensus Estimate of $23 billion. Also, the reported figure was up 2% on a year-over-year basis.

Net interest income, on a fully taxable-equivalent basis, grew 3% year over year to $12.3 billion, driven by higher rates, and loan and deposit growth. Further, net interest yield was up 3 basis points (bps) to 2.44%.

Non-interest income increased 2% from the year-ago quarter to $10.9 billion.

Non-interest expenses were $13.2 billion, up marginally.

Efficiency ratio was 57.11%, down from 58.25% in the year-ago quarter. Decline in efficiency ratio indicates improved profitability.

Credit Quality: A Mixed Bag

Provision for credit losses increased 4% on a year-over-year basis to $857 million.

However, net charge-offs declined 11% to $991 million, mainly due to recoveries from sales of previously charged-off non-core home equity loans, partly offset by an increase in commercial charge-offs. Further, as of Jun 30, 2019, ratio of non-performing assets ratio was 0.47%, down 19 bps.

Strong Capital Position

The company’s book value per share as of Jun 30, 2019, was $26.41 compared with $24.07 on Jun 30, 2018. Tangible book value per share as of the second-quarter end was $18.92, up from $17.07 a year ago.

At the end of June 2019, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 12.0%, up from 11.5% as of Jun 30, 2018.

Share Repurchase Update

During the reported quarter, BofA repurchased shares worth $6.5 billion.

Outlook

During the second half of the year, NII is projected to benefit from growth in loan and deposits, and an additional day of interest in the third quarter. However, lower rates will be a headwind.

For 2019, management anticipates NII to be up nearly 2% (down from growth of 3% as previously guided), based on the assumption of flattish yield curve, two rate cuts this year, and modest loan and deposit growth.

In 2019, core loan growth is anticipated to be in the low-single digits.

In the second half of 2019, operating expenses are expected to be roughly equal to first-half level. Increased technology investment in the second half along with the cost of adding new client facing professionals will likely be offset by the seasonally lower incentive costs.

Additionally, 2019 operating expenses are expected to be slightly lower than reclassified 2018 level (on adjusted basis)

With LIBOR rates lower than first-quarter level and the forward curve projecting further declines, management expects client deposit rates to move lower over the third quarter.

Net charge-offs (NCOs) are expected to remain approximately $1 billion in each of the remaining quarters of 2019, on the assumption of no change on current economic conditions. Further, provisions are expected to roughly match NCOs in sync with loan growth.

The effective tax rate (in absence of unusual items) is expected to be roughly 19%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

Currently, Bank of America has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Bank of America has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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