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Morningstar | Revenue Growth Is Slowing, but Expense Control and Net Income Growth Still There for Bank of America

Wide-moat rated Bank of America reported decent results for the first quarter of 2019. In a similar vein as peers, underlying cost control and earnings per share growth were strong, but revenue growth was muted. This was not entirely surprising, as the biggest drag came from the Global Markets segment, where sales and trading fees took a hit during the March quarter. We have seen this trend throughout the industry. Other than this, results were fairly strong for the bank.

While revenue was essentially flat, expenses were down 4%, and with the average dilute share count down 7%, earnings per share increased 13%. The efficiency ratio came in at 57.5%--another quarter of improvement. Finally, the return on average assets came in at 1.26% and the return on tangible common equity came in at 16.01%. Both were improvements over last year.

Market related revenue growth will come and go, as it is cyclical in nature, and in the meantime we see Bank of America continuing to post similarly strong numbers as its core commercial and consumer franchises produce steady results. As the bank has more room to hold expenses steady, we would not be surprised to see some additional improvements in profitability in the future. These results largely fit within our overall thesis for Bank of America, and after making some modest adjustments to our projections, we are maintaining our fair value estimate of $33 per share.

We like that Bank of America has seen steady deposit growth, up 5% year over year, and that this growth is occurring across business segments. While overall loan growth was a bit slower, the bank continues to run off certain portfolios, and core loan growth was at 4%, driven by mortgages within the consumer segment and core C&I loans within the commercial segment. Credit quality has remained fairly stable, although provisioning did tick up a bit during the March quarter. There has been some seasoning within the credit card portfolio, which is normal. Otherwise, delinquencies and nonperforming loans were still very healthy. Net interest income was up 5%, however, we wouldn’t expect much growth from the current quarterly run rate. The bank remains asset sensitive, but we don’t envision any more rate hikes for 2019.

Consumer Banking performed well, with rising profitability and declining expenses. Credit and debit card purchase volumes were up 3% year over year, a bit slower than some peers, but still very reasonable. Consumer investment assets continued to increase, up 16%, and we did see some rebound in mortgage activity as longer-term rates have declined. Global Wealth and Investment Management saw a decent rebound in assets after a tougher fourth quarter, and overall AUM flows were once again positive. Largely thanks to continued expense cutting, profitability recovered and net income was up 14%. As discussed earlier, it remained a tougher I-banking and trading environment for the Global Banking and Global Markets segments, but overall each segment maintained or even improved returns on allocated capital year over year.