Business context and reporting period
Bank of America Corporation’s Form 10-K covers the fiscal year ended December 31, 2018; it also reports fourth-quarter results. The company operates consumer and commercial banking, wealth management, investment banking and trading businesses through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other. All amounts below are U.S. dollars.
Financial performance and condition
Full-year results
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue, net of interest expense (GAAP) | $91.247 billion | $87.352 billion |
| Net interest income (GAAP) | $47.432 billion | $44.667 billion |
| Net income | $28.147 billion | $18.232 billion |
| Net income applicable to common shareholders | $26.696 billion | $16.618 billion |
| Diluted EPS | $2.61 | $1.56 |
| Provision for credit losses | $3.282 billion | $3.396 billion |
| Noninterest expense | $53.381 billion | $54.743 billion |
| Effective tax rate | 18.6% | 37.6% |
| Return on average assets | 1.21% | 0.80% |
| Efficiency ratio | 58.50% | 62.67% |
Net interest yield on a fully taxable-equivalent (FTE) basis was 2.42%, up from 2.37%. FTE net interest income was $48.042 billion, compared with $45.592 billion.
Fourth-quarter results
Q4 2018 revenue was $22.736 billion versus $20.436 billion in Q4 2017; net income was $7.278 billion versus $2.365 billion; diluted EPS was $0.70 versus $0.20. Q4 provision for credit losses was $905 million, compared with $1.001 billion. The year-over-year profit comparison is significantly affected by the $2.9 billion Tax Act-related charge recorded in Q4 2017.
Balance sheet, funding and capital
- At year-end, total assets were $2.355 trillion, loans and leases were $946.9 billion, and deposits were $1.381 trillion. Deposits increased 5% and loans and leases increased 1% from year-end 2017.
- Long-term debt was $229.3 billion, up from $227.4 billion; short-term borrowings were $20.2 billion, down from $32.7 billion. Total shareholders’ equity was $265.3 billion, down from $267.1 billion.
- Cash and cash equivalents were $177.4 billion. Average Global Liquidity Sources (GLS) for Q4 were $544 billion; average consolidated liquidity coverage ratio (LCR) was 118%, versus 125% a year earlier.
- Regulatory capital ratios at year-end included standardized CET1 of 11.6%, Tier 1 of 13.2% and total capital of 15.4% (the Advanced approaches total capital ratio was 15.1%). The Corporation reported that it met the “well-capitalized” definition.
- Cash flow from operating activities was $39.5 billion; investing activities used $71.5 billion; financing activities provided $53.1 billion. Cash and cash equivalents increased $20.0 billion during the year.
Credit quality and shareholder returns
Nonperforming loans, leases and foreclosed properties declined to $5.244 billion from $6.758 billion. Net charge-offs were $3.763 billion, or 0.41% of average loans and leases, compared with $3.979 billion, or 0.44%. The allowance for credit losses was $10.398 billion, down from $11.170 billion; the loan-loss allowance equaled 1.02% of loans and leases, versus 1.12%.
The company repurchased $20.1 billion of common stock in 2018 and paid $0.54 per common share in dividends. It reported $27.0 billion of total returns of capital through common and preferred dividends and repurchases.
Material changes versus the prior comparable period
- Revenue rose 4.5%; net income rose substantially, but the comparison reflects the prior-year Tax Act charge. The effective tax rate fell to 18.6% from 37.6%, and management attributed much of the earnings increase to tax effects alongside higher net interest income and lower expenses.
- Net interest income increased $2.8 billion, primarily from higher rates and loan and deposit growth, partly offset by tighter spreads, higher Global Markets funding costs and the 2017 sale of the non-U.S. consumer card business.
- Noninterest income increased $1.1 billion. Trading account profits rose $1.3 billion, while investment banking income declined $684 million. Other income included $731 million in gains on consumer real estate loan sales and a $729 million charge related to trust preferred security redemptions.
- Noninterest expense decreased $1.4 billion, mainly due to lower litigation and FDIC expenses and the absence of a $316 million 2017 data-center impairment charge.
- Assets rose 3%; deposits rose 5%; loans and leases rose 1%. The allowance for credit losses declined, reflecting credit improvement and runoff/sales in non-core real estate portfolios.
- GWIM client balances declined 5% to $2.621 trillion, primarily reflecting lower market valuations, partly offset by positive client flows. Global Banking revenue declined 2%, including lower investment banking fees; Global Markets revenue increased 1%, with stronger equity trading offsetting weaker fixed-income, currencies and commodities activity.
Outlook, management commentary, risks and unusual items
- Management expected a 2019 effective tax rate of approximately 19%, absent unusual items. The filing does not provide a specific consolidated earnings or revenue forecast.
- For the next 12 months, the company estimated that an instantaneous parallel 100-basis-point rate increase would add $2.651 billion to banking-book net interest income; a 100-basis-point decrease would reduce it by $4.109 billion. These estimates assume no management response and no changes in deposit size or mix.
- The company’s 2018 CCAR plan authorized approximately $20.6 billion of repurchases through June 30, 2019; an additional $2.5 billion authorization was announced in February 2019. Repurchases remain subject to capital, liquidity, performance and market conditions.
- Management cited ongoing uncertainty over the U.K.’s planned EU exit, market and interest-rate volatility, a flattening yield curve, credit conditions, funding access and credit ratings, cyber and operational risks, and extensive regulatory and legal requirements. The U.K./EU exit was scheduled for March 29, 2019; the outcome and operating impacts remained uncertain.
- LIBOR transition is a material execution and contract risk: the FCA said it would no longer persuade or require banks to submit rates after 2021. The company was reviewing legacy contracts and preparing systems and models for alternative rates.
- At year-end, unresolved mortgage repurchase claims were $14.4 billion and the recorded representations-and-warranties liability was $2.0 billion. The estimated aggregate range of reasonably possible loss for certain litigation and representations-and-warranties matters was $0–$1.9 billion in excess of related accrued liabilities, if any. The company cautioned that estimates are uncertain and excluded some servicing and other claims.
- The company expected the new current expected credit loss standard to take effect January 1, 2020; adoption could increase the allowance and reduce retained earnings, with the amount not yet clear. Adoption of new lease accounting in January 2019 resulted in recognition of $9.7 billion of right-of-use assets and lease liabilities.
- Other notable items included the $729 million trust preferred redemption charge, $731 million loan-sale gains, and a $4.0 billion after-tax reduction in the fair value of available-for-sale debt securities recorded in accumulated other comprehensive income.
Most important facts for investors to verify
- How much of the earnings improvement reflects recurring operating performance versus the Tax Act comparison and other unusual items.
- Whether deposit pricing, funding costs and yield-curve changes sustain net interest income growth; compare the disclosed sensitivity assumptions with subsequent results.
- Whether consumer credit-card seasoning and charge-offs, commercial credit exposures and allowance levels remain consistent with the reported credit trends.
- Whether liquidity, capital ratios and subsidiary dividend capacity support planned shareholder distributions as regulatory requirements evolve.
- How mortgage repurchase, litigation and regulatory matters develop relative to recorded reserves and the disclosed possible-loss range.
- Progress and costs associated with the LIBOR transition, U.K./EU restructuring and the planned broker-dealer reorganization.