BANK OF AMERICA CORP quarterly report, Q3 FY2017

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Business context and reporting period

Bank of America Corporation filed this unaudited Form 10-Q for the quarter ended September 30, 2017. The company operates through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other. It reported approximately $2.3 trillion in assets and 210,000 employees.

Financial results and key metrics

Unless otherwise noted, dollar amounts are U.S. dollars.

  • Third quarter: Revenue, net of interest expense, was $21.84 billion, up 0.9% year over year. Net income was $5.59 billion, up 12.8%; diluted EPS was $0.48 versus $0.41. Net income applicable to common shareholders was $5.12 billion.
  • First nine months: Revenue was $66.92 billion, up 5.0%; net income was $15.71 billion, up 18.9%; diluted EPS was $1.35 versus $1.10.
  • Net interest and operating performance: Third-quarter net interest income was $11.16 billion, up $960 million. On a fully taxable-equivalent (FTE) basis, net interest yield was 2.36%, up 13 basis points, and the efficiency ratio improved to 59.51% from 61.66%. Return on average assets was 0.98%; return on average common equity was 8.14%.
  • Credit costs and expenses: Provision for credit losses was $834 million in the quarter and $2.40 billion year to date, down from comparable 2016 periods. Noninterest expense was $13.14 billion in the quarter and $41.71 billion year to date; year-to-date expense was broadly flat.
  • Balance sheet: At September 30, total assets were $2.284 trillion, loans and leases $927.1 billion, deposits $1.284 trillion, long-term debt $228.7 billion and shareholders’ equity $272.5 billion. Since year-end 2016, assets rose $96.2 billion and deposits rose $23.5 billion.
  • Credit quality: Allowance for credit losses was $11.46 billion; nonperforming loans, leases and foreclosed properties were $6.87 billion. Net charge-offs were $900 million for the quarter, or 0.39% of average loans on an annualized basis.
  • Cash flow: For the nine months, operating activities provided $17.45 billion, investing activities used $40.04 billion and financing activities provided $45.35 billion. Cash and cash equivalents increased $24.64 billion to $172.38 billion. Operating cash flow was below the $26.72 billion reported for the prior-year period.
  • Capital and liquidity: The Basel III Advanced transition common equity tier 1 ratio was 11.9%, versus 11.0% at year-end 2016; the standardized ratio was 12.5%. Average Global Liquidity Sources were $517 billion, average consolidated liquidity coverage ratio was 126%, and parent-company time-to-required funding was 52 months.

Material changes versus comparable periods

  • Quarterly earnings growth reflected higher net interest income and lower provision and expenses, while noninterest income fell $756 million, principally due to weaker mortgage banking income and lower trading profits.
  • Year-to-date net interest income rose $2.4 billion, benefiting from higher rates, loan and deposit growth. Noninterest income increased $804 million, including the gain on sale of the non-U.S. consumer credit card business.
  • Global Banking’s third-quarter net income rose 13% to $1.76 billion, while Global Markets’ fell 30% to $756 million amid weaker trading conditions. GWIM net income increased 10% to $769 million; Consumer Banking net income increased 15% to $2.09 billion.
  • Nonperforming loans and leases declined from $7.71 billion at year-end 2016 to $6.57 billion, while the allowance-to-loans ratio declined from 1.26% to 1.16%.
  • The company repurchased approximately $3.0 billion of common stock in the quarter and paid a $0.12 per-share common dividend, up from $0.075 a year earlier. Exercise of Series T warrants issued 700 million common shares and transferred the preferred stock’s carrying amount to additional paid-in capital; the filing says this had no effect on diluted EPS.

Outlook, commentary, risks and unusual items

  • Management provided no specific earnings or revenue guidance in the supplied filing text. It identified achieving expense targets and net interest income expectations as forward-looking uncertainties.
  • Management described U.S. growth as softer and inflation as subdued in the quarter; hurricanes added uncertainty and were estimated to reduce annualized GDP growth by 0.1 to 0.5 percentage points. The company said it did not believe the storms would have a material financial impact, while noting its assessment was ongoing.
  • The company remains asset-sensitive to rising rates: an instantaneous +100-basis-point parallel shift was estimated to increase next-12-month net interest income by $3.23 billion; a -50-basis-point shift was estimated to reduce it by $2.31 billion. These estimates assume no management response and depend on deposit behavior and other assumptions.
  • The second-quarter sale of the non-U.S. consumer credit card business generated a $793 million pretax gain and $690 million tax expense, for a $103 million after-tax gain; cash proceeds were $10.9 billion. The company indemnified the buyer for substantially all payment protection insurance exposure above assumed reserves.
  • Other notable items included a $295 million impairment charge for data centers being sold and a $690 million tax expense associated with the card-business sale. The year-to-date provision for representations and warranties was $193 million; the reserve was $2.15 billion. Management estimated reasonably possible representations-and-warranties losses of up to $2 billion above that reserve.
  • For certain other litigation matters, management estimated aggregate reasonably possible losses of $0 to $1.5 billion above related accrued liabilities, if any. It cautioned that actual outcomes could differ and that an adverse outcome could materially affect results or liquidity in a particular period.
  • Principal stated risks include litigation and regulatory actions, mortgage repurchase and indemnity claims, credit deterioration, interest-rate and currency movements, regulatory capital and liquidity changes, cyber or operational failures, Brexit-related effects and economic or geopolitical stress. The filing also notes energy exposure improved but remains a credit-risk area.

Important facts for investors to verify

  1. Review the full financial statements and notes for the quality and sustainability of earnings, including the card-business sale gain, tax expense and data-center impairment.
  2. Assess the adequacy of credit reserves and trends in credit-card losses, consumer loan seasoning, energy exposures and nonperforming assets.
  3. Evaluate the potential range, timing and uncertainty of mortgage representations-and-warranties claims and other litigation beyond recorded accruals.
  4. Check capital and liquidity measures against applicable regulatory requirements, including the pending internal-model approval, fully phased-in capital rules and evolving TLAC requirements.
  5. Consider the assumptions behind interest-rate sensitivity estimates and the effects of deposit repricing, market conditions and any future regulatory or economic changes.