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Morningstar | Bank of America Shows True Earnings Power in 2018, We Expect Much of the Same in 2019

Narrow-moat Bank of America continued its solid results in the fourth quarter. Year-over-year revenue growth for the quarter was strong at 6%, while expenses continued to decline, down 1%. The bank reported a full-year efficiency ratio of 58.5%, a vast improvement over the mid to upper 60% levels the bank was hitting for several years prior. The bank reported a 1.21% return on average assets and a 15.5% return on tangible common equity for full-year results. We have long believed that Bank of America has transformed into a much improved franchise following the crisis. It has been years in the making, but we believe these results provide strong support that the bank has arrived at new levels of operating performance. As these results largely fit within our overall thesis for Bank of America, we are maintaining our fair value estimate of $33 per share.

Credit quality remained superb with provisioning and net charge-offs remaining range bound, while nonperforming loans even declined slightly. Net interest income growth was strong, at 7% year over year for quarterly results, driven by an expanding net interest margin (up 7 basis points from the third quarter) and a growing balance sheet, with average earning assets up 1.9% from fourth-quarter 2017. Average loans and leases were up 1% year over year, mostly driven by stronger consumer loan growth. The bank remains asset sensitive, and we would expect some additional net interest margin expansion in 2019.

Consumer Banking performed well, as credit and debit card purchase volumes were up 6% year over year for quarterly results, and the risk adjusted credit card margin continued to improve, up to 8.83%. Brokerage assets were down slightly compared with the third quarter but were still up 5% year over year. Global Wealth and Investment Management was predictably affected by a tough market environment in the fourth quarter, but we would highlight that organic growth in Merrill Lynch households was still quite strong for 2018 as a whole, and the bank was still experiencing net positive organic flows. Oraganic flows are more under the bank’s control than overall market levels in any given quarter. It was a tougher trading and investment banking environment for the Global Banking and Global Markets segments, but overall each segment maintained or even improved returns on allocated capital year over year.