Bank of America Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods 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. At quarter-end, it reported $2.40 trillion in assets and approximately 209,000 employees.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue, net of interest expense | $23.08bn | $22.55bn | $46.09bn | $45.62bn |
| Net interest income | $12.19bn | $11.83bn | $24.56bn | $23.60bn |
| Provision for credit losses | $857m | $827m | $1.87bn | $1.66bn |
| Noninterest expense | $13.27bn | $13.22bn | $26.49bn | $27.07bn |
| Net income | $7.35bn | $6.78bn | $14.66bn | $13.70bn |
| Diluted earnings per share | $0.74 | $0.63 | $1.45 | $1.25 |
| Efficiency ratio | 57.48% | 58.65% | 57.48% | 59.33% |
Q2 return on average assets was 1.23%; return on average common equity was 11.62%. Fully taxable-equivalent net interest yield was 2.44%, up 3 basis points year over year. These FTE measures are non-GAAP.
Balance sheet and capital at June 30: Total assets were $2.396tn, loans and leases $963.8bn, deposits $1.375tn, total liabilities $2.124tn and shareholders’ equity $271.4bn. Long-term debt was $238.0bn, up from $229.4bn at December 31, 2018. CET1 was 11.7% under the Standardized approach; the bank reported that it met applicable well-capitalized requirements. Allowance for credit losses was $10.33bn, including $9.53bn for loan and lease losses and $806m for unfunded commitments.
Cash flow for the first six months: Operating activities provided $8.38bn, investing activities used $7.22bn and financing activities used $7.59bn. Cash and cash equivalents fell by $6.01bn to $171.39bn. Average global liquidity sources were $552bn; average consolidated liquidity coverage ratio was 115%.
Material changes and business trends
- Net income rose 8% in Q2 and 7% year to date. Higher net interest income contributed to the increase; year-to-date expense reductions also helped, while credit-loss provisions increased.
- Year-to-date noninterest income declined $498m, primarily reflecting lower investment and brokerage income and investment banking fees. Q2 noninterest income increased $174m, including higher trading income and other income.
- Consumer Banking Q2 net income rose 13% to $3.29bn. GWIM net income increased 11% to $1.07bn; client balances reached $2.90tn. Global Banking net income fell 9% to $1.93bn, largely due to a higher credit provision. Global Markets net income fell 7% to $1.05bn; year-to-date it fell 18% to $2.08bn, amid weaker sales and trading revenue.
- Loans and leases increased from year-end by $16.9bn; deposits decreased by $6.4bn. Consumer nonperforming loans declined, while commercial nonperforming loans rose modestly.
Outlook, risks and unusual items
- Management expected 2019 net interest income to grow versus 2018: approximately 2% if rates and other conditions remained as of July 17, 2019, or approximately 1% under the forward curve’s implied two 25-basis-point Fed cuts. The filing also expected an effective tax rate of approximately 19% for the rest of 2019, absent unusual items.
- Management expected net charge-offs of approximately $1bn in each remaining 2019 quarter, assuming current economic conditions continued. Adoption of the expected-credit-loss standard on January 1, 2020 could increase the allowance for loans and leases by up to 20% from the June 30, 2019 level; management said the eventual effect would depend on economic forecasts, portfolio characteristics and other judgments.
- After the quarter, Bank of America gave notice that it would terminate its merchant-services joint venture at the end of its June 2020 term. It expects a non-cash pretax impairment charge of $1.7bn–$2.1bn in Q3 2019, estimated to reduce CET1 by 9–11 basis points. The company expects continuity of merchant services through at least June 2023.
- The Federal Reserve did not object to the 2019 capital plan, which management estimated would return $37bn to common shareholders over four quarters. The Board authorized up to $30.9bn of repurchases through June 2020 and raised the quarterly dividend to $0.18 per share, payable September 27, 2019.
- Risks include changing interest rates and deposit pricing, credit deterioration, global and U.K./EU economic or market disruption, LIBOR transition, cyber and operational events, regulatory and capital requirements, and litigation or regulatory proceedings. The estimated aggregate range of reasonably possible loss on certain matters, beyond accrued liabilities, was $0–$1.9bn; the filing cautions that this is not a maximum exposure. A precious-metals trading matter was resolved for $36.5m, with remedial obligations.
Important facts for investors to verify
- Whether the projected net interest income growth and remaining-year charge-offs track management’s assumptions, especially if rates or economic conditions change.
- The actual size, timing and capital effect of the merchant-services impairment, and execution of the replacement strategy.
- The final allowance impact of the 2020 expected-credit-loss standard, particularly for U.S. credit cards.
- Credit trends: card portfolio seasoning and charge-offs, commercial criticized exposure and the single-name utility charge-off, and continued improvement or deterioration in consumer real estate.
- Capital distributions against regulatory requirements and the company’s ability to maintain liquidity, funding access and capital buffers.
- Developments in litigation and regulatory matters, LIBOR transition, and U.K./EU withdrawal arrangements.