BANK OF AMERICA CORP quarterly report, Q1 FY2017

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Bank of America Corporation — Q1 2017 Form 10-Q

Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are primarily with December 31, 2016. Bank of America is a diversified bank holding company with Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets and All Other businesses. It reported approximately $2.2 trillion in assets.

Financial performance and position

  • Revenue: $22.25 billion, up 7% from $20.79 billion in Q1 2016. Net interest income was $11.06 billion, up 5%; net interest yield rose 6 basis points to 2.35%. Noninterest income increased 9% to $11.19 billion.
  • Profit: Net income was $4.86 billion, up 40%; diluted EPS was $0.41 versus $0.28. Net income applicable to common shareholders was $4.35 billion. The effective tax rate was 26.0%, including a $222 million tax benefit from new share-based compensation accounting.
  • Costs and margins: Noninterest expense was $14.85 billion, essentially unchanged year over year. The efficiency ratio improved to 66.74% from 71.27%. Return on average assets was 0.88% versus 0.64%; return on average common equity was 7.27% versus 5.11%.
  • Cash flow: Operating activities used $12.85 billion, compared with $10.90 billion provided in Q1 2016. Investing activities used $14.02 billion; financing activities provided $46.34 billion. Cash and cash equivalents increased $20.29 billion to $168.03 billion. Cash flows reflected significant trading, securities, deposit and short-term funding movements.
  • Balance sheet and funding: Total assets were $2.248 trillion, up $60.0 billion from year-end; deposits were $1.272 trillion, up $11.2 billion. Total loans and leases were $906.2 billion, nearly flat from year-end. Long-term debt was $221.4 billion, up $4.6 billion; total liabilities were $1.980 trillion.
  • Liquidity: Global Liquidity Sources were $519 billion, up from $499 billion at year-end. Parent-company and NB Holdings liquidity was $79 billion. Parent-company time-to-required funding improved to 40 months from 35 months. The company and insured depository institutions were above the 2017 LCR requirement.
  • Capital: Basel 3 Advanced-transition CET1 ratio was 11.0% and total capital ratio 14.4%; the company stated it met the current “well capitalized” definition. The reported supplementary leverage ratio was 7.0%. Capital ratios and fully phased-in estimates depend on regulatory methods and assumptions.
  • Credit quality: Provision for credit losses was $835 million, down from $997 million; net charge-offs were $934 million, or 0.42% of average loans, versus $1.068 billion and 0.48%. Nonperforming loans, leases and foreclosed properties were $7.64 billion, down from $8.08 billion at year-end. The allowance for credit losses was $11.87 billion.
  • Shareholder returns: The company repurchased $2.7 billion of common stock in the quarter and paid a $0.075 per-share common dividend. Common shareholders’ equity was $242.9 billion.

Material changes versus Q1 2016

  • Higher net interest income reflected higher short-term rates and growth in loans and deposits. Higher investment banking fees and trading profits also supported revenue; mortgage banking income fell to $122 million from $433 million.
  • Global Banking net income rose to $1.73 billion from $1.09 billion, principally as the provision fell to $17 million from $553 million with improved energy exposures. Global Markets net income rose to $1.30 billion from $973 million, supported by stronger trading and investment banking revenue; noninterest expense increased.
  • Consumer Banking net income increased to $1.89 billion from $1.76 billion. Its provision rose to $838 million from $531 million, largely because of U.S. credit card growth and portfolio seasoning. GWIM net income increased to $770 million from $741 million.
  • All Other reported a net loss of $834 million versus $1.10 billion, reflecting lower expense and a larger tax benefit, partly offset by weaker mortgage banking income and securities-sale gains.
  • Q1 2017 comprehensive income was $4.83 billion versus $6.00 billion in Q1 2016, when other comprehensive income included a substantial securities valuation gain; Q1 2017 other comprehensive loss was $28 million.

Outlook, risks and unusual items

  • Management expected Q2 2017 provision for credit losses to approximate net charge-offs and an effective tax rate of approximately 30% for the remainder of 2017, absent unusual items. The filing provides no broader quantified earnings or revenue guidance.
  • The company was asset-sensitive to rising rates: a modeled instantaneous parallel increase of 100 basis points was estimated to add $3.34 billion to pretax net interest income over the next 12 months. The estimate assumes no management response or change in deposit mix; higher rates could also reduce securities values and affect capital through OCI.
  • Energy exposures improved, but remain a credit risk: commercial energy committed exposure was $37.9 billion; energy net charge-offs were $3 million versus $102 million a year earlier. Management cited potential future credit losses from economic weakness, oil-price volatility and changes in customer behavior.
  • Mortgage and legal exposures remain material. Unresolved repurchase claims were $18.3 billion, with a separate $1.3 billion of indemnity notifications. The recorded representations-and-warranties liability was $2.3 billion; management estimated reasonably possible losses up to $2 billion above accruals. This estimate excludes certain other mortgage-related, servicing and securities-law matters.
  • For certain litigation matters, management estimated an aggregate possible loss range of $0 to $1.5 billion above related accruals, where estimation was possible. It cautioned that actual outcomes could differ materially. Litigation-related expense was $274 million in Q1.
  • The FDIC invoiced Bank of America, N.A. for an additional $583 million of deposit insurance and interest related to 2012–2013 assessments; the bank disputed the claims and pledged security pending resolution.
  • The planned sale of the non-U.S. consumer credit card business, subject to regulatory approval and expected to close by mid-2017, would leave substantially all PPI exposure above existing reserves with Bank of America. The PPI reserve was $225 million. The sale was expected to produce a small after-tax gain and reduce risk-weighted assets and goodwill.
  • Other risks identified include regulatory capital and liquidity changes, Brexit, litigation and regulatory proceedings, cyber and operational failures, funding-market disruptions, and dependence on regulatory approval of internal capital models. The filing stated there were no material changes to the risk factors in the 2016 Form 10-K.

Important facts for investors to verify

  • Whether improved trading, investment banking and rate-driven net interest income persist, and how results respond to further rate changes and deposit repricing.
  • Whether credit costs remain contained as credit card balances season and whether energy-sector improvement continues; compare provision with charge-offs in subsequent quarters.
  • Developments in mortgage repurchase claims, the estimated additional loss range, the FDIC assessment dispute and other litigation or regulatory matters.
  • Progress and final economics of the non-U.S. card-business sale, including retained PPI exposure and the effect on capital.
  • Capital and liquidity measures under fully phased-in rules, Federal Reserve CCAR outcomes, and the pace of buybacks and dividends.
  • Cash-flow variability and reliance on short-term and secured funding; the stated liquidity resources are distributed across legal entities and may not be freely transferable.