Lower operating expenses and solid fixed income trading revenues drove Bank of America Corporation’s (BAC - Analyst Report) fourth-quarter 2015 earnings of 28 cents per share, which surpassed the Zacks Consensus Estimate by 3.7%. Further, the bottom line witnessed a 12% year-over-year improvement.
The quarterly results included 3 cents per share of reduction in NII for certain trust preferred securities and 3 cents per share of negative impact from U.K. tax law changes. Excluding these, the company earned 34 cents per share.
BofA’s shares jumped more than 2% in pre-market trading, which, we believe, depicted investors’ optimism regarding improvement in revenues and success of its cost-saving plan. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.
BofA’s success story was largely driven by ‘expense control’ and no legal expenses. Further, a rise in mortgage banking income, fixed income trading revenue and card fees supported the bottom line.
Reduced long-term debt, attributable to maturities and improved funding costs, also featured among the positives.
Further, overall performance of the company’s business segments, in terms of net income generation, was encouraging. All segments, other than Global Wealth and Investment Management, Legacy Assets and Servicing and Global Markets, witnessed year-over-year rise in net income.
However, weakness in equity trading income and investment banking fees were the undermining factors. Also, a rise in provision for loan losses added to the concerns.
Details
Net revenue amounted to $19.5 billion, up 4% from $18.7 billion recorded in the prior-year quarter. However, the top line missed the Zacks Consensus Estimate of $20.3 billion.
Net interest income, on a fully taxable-equivalent basis, improved 2% year over year to $10 billion. Further, net interest yield fell 2 basis points (bps) year over year to 2.16%.
Non-interest income grew 72% year over year to $9.7 billion.
Non-interest expense was $13.9 billion, decreasing 2% year over year. Moreover, non-interest expense, excluding litigation costs, fell 3% year over year to $13.4 billion. The decline reflected success of the company’s aggressive cost-containment measures and continued progress of Legacy Assets and Servicing cost initiatives.
The company’s book value per share as of Dec 31, 2015 was $22.54, compared with $21.32 as of Dec 31, 2014. Tangible book value per share as of Dec 31, 2015 was $15.62, up from $14.43 at the end of 2014.
As of Dec 31, 2015, the company’s common equity tier 1 capital ratio (Basel 3 Transition) was 10.2%, down from 12.3% as of Dec 31, 2014.
Credit Quality
Credit quality depicted mixed results during the quarter. As of Dec 31, 2015, ratio of nonperforming loans, leases and foreclosed properties was 1.10%, down 35 bps year over year.
However, net charge-offs increased 30% to $1,144 million. Also, provision for credit losses surged significantly to $810 million. The drastic rise was led by lower consumer recoveries, slower pace of improvement in the consumer portfolio and higher reserve builds owing to loan growth and energy sector exposure.
Our Take
2015 began on a positive note for BofA with prudent cost management efforts and no significant legal expenses supporting its bottom line. Moreover, the company has been focusing on realigning its balance sheet in accordance with regulatory changes.
However, global equity market turmoil, slump in oil prices and slow client activities had a profound adverse impact on the company’s performance. Also, despite the Federal Reserve’s rate hike, the top line will remain under strain as global macroeconomic factors will likely continue as near-term headwinds.
Currently, BofA carries a Zacks Rank #4 (Sell).
Among other Wall Street banks, JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Co. (WFC - Analyst Report) and Citigroup Inc. (C - Analyst Report) have already come out with fourth-quarter and 2015 results. Improved top line and cost-containment efforts were the main highlights of their results.
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