Bank of America reported a decline in its second-quarter profits on Tuesday. The bank earned $6.9 billion in Q2, down from $7.4 billion a year earlier. On a per-share basis, the bank earned 83 cents, surpassing analysts’ estimates.
Total revenue for the bank was $25.4 billion, a slight increase from $25.2 billion the previous year. Higher interest rates impacted the bank’s large consumer banking franchise. Much of the bank’s interest income was offset by increased interest expenses.
The bank’s strategy to maintain a balance sheet of shorter-term securities meant it had to refinance at higher rates more promptly than its peers. This followed the Federal Reserve’s interest rate hikes. Despite challenges in consumer banking, the bank saw a resurgence in its investment banking division.
Increased sales and trading revenue from its stock and bond trading desks contributed positively. Higher advisory revenue also helped. The bank reported fewer credit losses and delinquencies than its competitors.
This resulted in only a modest increase in reserves set aside for loan losses. In morning trading, shares of Bank of America Corp. rallied 5.2% to $44.09.
This reflected a positive investor response to the earnings report. Bank of America surged following the release of its latest quarterly earnings. The megabank beat expectations with results benefiting from a resilient economic backdrop and improving credit conditions.
The stock is up an impressive 31% year to date, climbing back to its highest level since early 2022. Bank of America reported second-quarter earnings per share (EPS) of $0.83, ahead of the average Wall Street estimate of $0.80. Revenue of $25.4 billion was above the $25.2 billion forecast, and up 1% year over year.
The global wealth and investment management business saw momentum this quarter. Revenue increased 6% from the prior-year quarter, driven by higher fees and net asset under management flows. Segment client balances reached a record $4 trillion, up 10% from Q2 2023.
The bank’s global markets segment is also capturing strong performance in financial markets. This is boosting sales and trading activity. Trends from the consumer banking group were more mixed.
Segment revenue and net interest income were down from last year as higher deposit costs offset higher asset yields. However, average loans and leases saw a modest 2% year-over-year increase. Management is pointing to solid consumer banking operating metrics, including a gain in market share.
The bank added 278,000 net new checking accounts, marking 22 consecutive quarters of growth.
bank sees mixed Q2 performance
CEO Brian Moynihan commented on these dynamics during the earnings conference call.
He said, “So if you think about consumer credit, the card charge-offs drive it and have flattened out in terms of delinquencies, and we expect them to improve in the second half.”
Bank of America is proving it can generate organic growth despite the challenging macro environment in recent years. The bullish case for the stock considers the possibility that the Federal Reserve may move forward with interest rate cuts given the declining inflation outlook. This scenario would likely drive a resurgence in credit demand and lending activity.
It represents a new earnings tailwind for the bank. Bank of America is trading at 13.6 times its consensus 2024 earnings per share of $3.22, as a forward price-to-earnings (P/E) ratio, and 1.3 times its book value. Both of these multiples are below their levels in 2022 when the stock reached its all-time high.
There is a case to be made that the bank’s long-term outlook today is stronger than ever. The stock may be undervalued with room for more upside. As long as economic growth remains steady, Bank of America should continue delivering positive shareholder returns.
For investors with a long-term time horizon, the stock can make a great addition to a diversified portfolio. Bank of America beats profit estimates and forecasts growth in net interest income (NII), despite anticipated interest rate cuts. The bank’s 25% premium to book value is considered undervalued, reinforcing its status as a ‘Buy’ for investors.
Last week, Bank of America reported better-than-expected earnings. It predicted NII growth even as the central bank is set to lower interest rates thrice in 2024. This robust NII forecast adds to the bank’s appeal, particularly as the U.S. economy shows signs of strength with receding inflation potentially boosting consumer spending.
Bank of America’s second quarter results were impressive, with profits of $0.83 per share exceeding the estimate of $0.80 per share. The strong performance in consumer and investment banking, along with resilient NII, positions the bank well, even amidst falling inflation. In 2Q24, Bank of America earned $13.9 billion in net interest income, a slight decrease of $300 million from the previous quarter.
Despite this minor drop, the 2024 NII forecast projects a $600 million increase over the 2Q24 level. This indicates a solid bottom-line growth potential for the year. From a valuation standpoint, the bank’s stock remains attractively priced, maintaining a positive risk/reward relationship.
The stock is trading at a 25% premium to book value, which is more reasonable compared to Wells Fargo at 26% and significantly lower than Citigroup’s 88% premium. Bank of America’s solid NII forecast and the downtrend in inflation suggest it could achieve a 30% premium to book value. This corresponds to a $45 intrinsic value, which is likely to increase with the growth of its book value.
There are risks. If the central bank does not adopt a more aggressive rate policy, Bank of America’s NII might face pressure. Still, the bank’s current risk/reward profile is favorable.
With clarity on its NII, it is well-positioned to continue growing its book value. Bank of America remains a compelling investment even though it is not as cheap as earlier in the year. The bank’s ability to exceed profit estimates and maintain strong NII prospects makes it a good buy, especially on post-earnings dips.
