Bank of America Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless otherwise noted. Bank of America is a diversified U.S. and international financial-services company with four reportable segments: Consumer Banking, Global Wealth & Investment Management, Global Banking and Global Markets. At quarter-end, it reported $2.43 trillion in assets and approximately 209,000 employees.
Financial performance and position
| Metric | Q3 2019 | Prior comparable period |
|---|---|---|
| Revenue, net of interest expense (GAAP) | $22.81 billion | $22.72 billion |
| Net interest income | $12.19 billion | $12.06 billion |
| Noninterest income | $10.62 billion | $10.66 billion |
| Provision for credit losses | $779 million | $716 million |
| Noninterest expense | $15.17 billion | $13.01 billion |
| Net income | $5.78 billion | $7.17 billion |
| Diluted earnings per share | $0.56 | $0.66 |
| Efficiency ratio | 66.51% | 57.27% |
| Return on average assets | 0.95% | 1.23% |
- Nine-month results: Revenue was $68.90 billion versus $68.34 billion; net income was $20.44 billion versus $20.87 billion; diluted EPS was $2.01 versus $1.91. The nine-month effective tax rate was 16.9%, compared with 19.4%.
- Net interest margin: Net interest yield on a fully taxable-equivalent (FTE) basis was 2.41% in Q3, down 4 basis points year over year; for the first nine months it was 2.45%, up 2 basis points. FTE figures are non-GAAP measures.
- Cash flows: For the first nine months, operating activities provided $2.67 billion, investing activities used $37.35 billion and financing activities provided $15.24 billion. Cash and cash equivalents fell $20.31 billion to $157.09 billion. The filing attributes substantial cash-flow movements to securities, trading and balance-sheet activity.
- Balance sheet: At September 30, total assets were $2.43 trillion, loans and leases $972.91 billion, deposits $1.39 trillion, long-term debt $243.41 billion and shareholders’ equity $268.39 billion. Since year-end 2018, assets rose $71.8 billion, loans rose $26.0 billion and deposits rose $11.4 billion.
- Credit and capital: Allowance for credit losses was $10.24 billion; annualized net charge-offs were 0.34% of average loans. CET1 was 11.4% under the Standardized approach and 11.7% under Advanced approaches; supplementary leverage ratio was 6.6%. Management reported the Corporation met the definition of well-capitalized.
- Liquidity: Average global liquidity sources were $552 billion; average consolidated high-quality liquid assets were $454 billion and average liquidity coverage ratio was 116%.
Material changes and segment performance
- Q3 net income declined 19% year over year, principally because of a $2.1 billion pretax, non-cash impairment charge tied to the planned termination of the merchant-services joint venture. Higher credit provisions and lower noninterest income also weighed on results; increased net interest income partly offset these effects.
- Consumer Banking net income increased 5% to $3.33 billion in Q3, supported by loan and deposit growth. GWIM net income rose 8% to $1.10 billion. Global Banking net income increased 3% to $2.10 billion, with stronger noninterest income offsetting lower net interest income and higher provisions.
- Global Markets net income fell 8% to $847 million in Q3; nine-month net income declined 15% to $2.93 billion, mainly on weaker year-to-date trading revenue. All Other reported a Q3 net loss of $1.60 billion, primarily reflecting the joint-venture impairment and higher legacy mortgage litigation expense.
- Credit indicators were mixed: nonperforming consumer loans and foreclosed properties fell to $2.38 billion from $4.57 billion at September 2018, while nonperforming commercial loans and foreclosed properties rose to $1.35 billion from $878 million at September 2018. Commercial criticized exposure increased modestly; management attributed the increase to a small number of borrower downgrades across industries.
Outlook, commentary, risks and unusual items
- Management expected 2019 net interest income to grow approximately 1% versus 2018, assuming another short-end rate cut in Q4, long-term rates flat from September 30 levels and stable economic conditions. It expected a Q4 effective tax rate of approximately 19%, absent unusual items.
- The merchant-services joint venture, in which the Corporation owned 49%, is expected to remain an equity-method investment until June 2020. The company gave notice to terminate it at the end of its current term and expects to pursue its own merchant-services strategy; service continuity to merchants is covered through at least June 2023.
- On January 1, 2020, the new expected-credit-loss accounting standard was due to take effect. Based on then-current expectations, management estimated the allowance for credit losses on loans and leases could increase by up to approximately 30% from September 30, 2019 levels, with much of the increase associated with U.S. credit cards. The ultimate effect was uncertain and dependent on portfolios, forecasts and model validation.
- Key disclosed risks include interest-rate and economic changes, higher-than-expected credit losses, litigation and regulatory actions, cyber and operational disruption, LIBOR transition, trade and geopolitical tensions, and uncertainty surrounding the U.K.’s withdrawal from the EU. Management stated that the outcome and broader effects of Brexit remained uncertain.
- Litigation-related expense was $352 million for Q3 and $539 million for the first nine months. For certain matters where an estimate was possible, management estimated aggregate reasonably possible losses of $0–$1.8 billion in excess of accrued liabilities; it cautioned that this was not a maximum-loss estimate. The representations-and-warranties reserve was $1.8 billion at quarter-end.
- Capital distributions included $7.6 billion of common-stock repurchases in Q3 under a $30.9 billion authorization for July 2019–June 2020, and a $0.18 quarterly common dividend declared in October for payment in December.
Most important facts for investors to verify
- How much of the Q3 earnings decline reflects the one-time $2.1 billion impairment, and whether the planned transition to a standalone merchant-services strategy creates further costs or execution risks.
- Whether the approximately 1% full-year net-interest-income growth expectation remains achievable given rate changes, deposit pricing and loan growth.
- The final January 2020 credit-loss-standard transition impact, especially the expected allowance increase and sensitivity to economic forecasts and U.S. credit-card seasoning.
- Trends in commercial nonperforming loans, criticized exposures, provisions and charge-offs relative to portfolio growth.
- Developments in litigation, regulatory matters, Brexit, LIBOR transition and the Corporation’s ability to sustain liquidity, capital ratios and planned shareholder distributions.
- Cash-flow comparability: operating cash flow fell sharply year over year, and the filing shows significant trading, securities and other balance-sheet movements affecting reported cash flows.