Bank of America Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018 unless otherwise noted. Bank of America is a diversified financial services company operating through Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets and All Other.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue, net of interest expense | $23.125 billion | $22.248 billion |
| Net interest income | $11.608 billion | $11.058 billion |
| Noninterest income | $11.517 billion | $11.190 billion |
| Provision for credit losses | $834 million | $835 million |
| Noninterest expense | $13.897 billion | $14.093 billion |
| Net income | $6.918 billion | $5.337 billion |
| Diluted earnings per share | $0.62 | $0.45 |
| Efficiency ratio | 60.09% | 63.34% |
| Return on average assets | 1.21% | 0.97% |
| Return on average common equity | 10.85% | 8.09% |
Revenue rose about 4% year over year and net income about 30%. Management attributed improved earnings to higher net interest and noninterest income, lower expenses and lower income taxes, including the effect of U.S. tax reform. The effective tax rate was 17.6%, versus 27.1%; management expected approximately 20% for full-year 2018 absent unusual items. Net interest yield was reported at 2.36% (2.39% on a fully taxable-equivalent basis), up one basis point on the reported measure.
Balance sheet, cash flow, credit and capital
- Assets and funding: Total assets were $2.328 trillion, up $47.2 billion from year-end 2017. Deposits were $1.329 trillion, up $19.1 billion; total loans and leases were $934.1 billion, down $2.7 billion. Total liabilities were $2.062 trillion. Long-term debt was $232.3 billion, up $4.9 billion from year-end.
- Cash flow: Operating activities provided $40.4 billion, compared with $13.0 billion used in Q1 2017. Investing activities used $22.8 billion and financing activities provided $28.6 billion. Cash and cash equivalents increased $46.8 billion to $204.2 billion.
- Liquidity: Average global liquidity sources were $522 billion. Average consolidated high-quality liquid assets were $444 billion and average liquidity coverage ratio was 124%. Parent company and NB Holdings time-to-required funding was 56 months, versus 49 months at year-end.
- Credit quality: Net charge-offs were $911 million, or 0.40% of average loans, versus $934 million, or 0.42%, a year earlier. The allowance for credit losses was $11.0 billion, down from $11.2 billion at year-end; allowance for loan and lease losses was 1.11% of loans. Consumer real estate credit improved, while U.S. credit-card losses increased with portfolio seasoning and growth. Nonperforming commercial loans rose to $1.5 billion from $1.3 billion at year-end.
- Capital and shareholder returns: Common equity Tier 1 ratio was 11.3% under the Advanced Approaches; supplementary leverage ratio was 6.8%. The company said it met the current “well capitalized” definition. It repurchased approximately $4.9 billion of common stock and paid $0.12 per common share in dividends during the quarter. Total shareholders’ equity was $266.2 billion, down $0.9 billion from year-end.
Material changes and business segments
- Tax reform lowered the federal corporate tax rate to 21% from 35%, while also changing taxation of non-U.S. operations and eliminating the tax deduction for FDIC premiums. Management estimated a net reduction of about nine percentage points in its annual effective tax rate. The tax accounting remains subject to further guidance and interpretation.
- Consumer Banking net income increased 42% to $2.7 billion, supported by deposit growth, higher rates and lower taxes; credit-card provision and technology-related expenses increased.
- Global Wealth & Investment Management net income increased 34% to $1.0 billion. Client balances rose 5% year over year to $2.7 trillion, supported by market valuations and positive client flows.
- Global Banking net income increased 17% to $2.0 billion, mainly due to lower taxes; revenue was broadly flat and investment banking fees declined.
- Global Markets net income increased 12% to $1.5 billion, mainly due to lower taxes. Trading account profits rose, with stronger equities activity partly offset by weaker fixed-income, currencies and commodities results.
- All Other reported a $286 million net loss, improved from a $354 million loss, reflecting lower expenses and credit-loss benefits, partly offset by lower revenue.
Outlook, risks and unusual items
- Management forecast a 2018 effective tax rate of approximately 20%, absent unusual items. The filing does not provide broader numerical full-year earnings or revenue guidance.
- The company was asset-sensitive to rising interest rates. Its model estimated that an immediate parallel 100-basis-point increase would add $2.964 billion to pretax net interest income over the next 12 months; a 100-basis-point decrease would reduce it by $3.717 billion. These are scenario estimates, assume no management response, and depend on balance-sheet and deposit behavior assumptions.
- On April 30, 2018, the company announced redemption of 11 series of trust preferred securities, expected June 6, 2018. It anticipated an approximately $800 million pretax charge in Q2, subject to final redemption-price calculations.
- Market and economic risks include interest-rate and securities-valuation movements, increased market volatility, trade tensions and tariffs, geopolitical and non-U.S. exposures, and uncertainty related to the U.K.’s planned EU exit. Operational and cyber risks, regulatory changes and potential credit deterioration are also identified.
- Litigation-related expense was $116 million, down from $274 million a year earlier. For certain matters, management estimated aggregate reasonably possible losses of $0 to $1.2 billion in excess of accrued liabilities, if any; it cautioned that the estimate is not a maximum exposure. The representations-and-warranties and corporate-guarantees reserve was $2.0 billion, and additional losses are reasonably possible.
- Regulators had identified a resolution-plan shortcoming; the filing lists failure to remediate it as a risk. Proposed capital-rule changes and implementation of the expected-credit-loss standard, effective in 2020, could affect capital or reserves; the eventual impact was not quantified.
- Accumulated other comprehensive loss worsened by $5.2 billion during the quarter, including a $4.0 billion after-tax decline in debt and equity securities. The company cited market-value declines as a contributor to lower equity and regulatory capital.
Most important facts for investors to verify
- Whether earnings growth persists after separating recurring operating improvement from lower tax expense and tax-law effects.
- How deposit pricing, funding costs and customer deposit behavior affect net interest income as rates change.
- Whether U.S. credit-card seasoning, rising charge-offs or commercial nonperforming loans lead to higher provisions.
- The final amount and timing of the expected approximately $800 million trust-preferred-redemption charge.
- Developments in litigation, representations-and-warranties exposure, regulatory matters and the resolution-plan remediation issue.
- The effect of market movements on securities-related accumulated OCI, capital ratios, liquidity and the planned pace of repurchases.