Business context and reporting period
Bank of America Corporation’s Form 10-Q covers the quarter and nine months ended September 30, 2023. The diversified financial-services company reported through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other. At quarter-end, it had $3.15 trillion in assets and approximately 213,000 employees.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue, net of interest expense | $25.17B | $24.50B | $76.62B | $70.42B |
| Net interest income (GAAP) | $14.38B | $13.77B | $42.99B | $37.78B |
| Provision for credit losses | $1.23B | $0.90B | $3.29B | $1.45B |
| Noninterest expense | $15.84B | $15.30B | $48.11B | $45.90B |
| Net income | $7.80B | $7.08B | $23.37B | $20.40B |
| Diluted EPS | $0.90 | $0.81 | $2.72 | $2.34 |
| Return on average assets | 0.99% | 0.90% | 1.00% | 0.86% |
| Efficiency ratio | 62.93% | 62.45% | 62.79% | 65.17% |
- Net interest yield on a fully taxable-equivalent basis was 2.11% in Q3 versus 2.06% a year earlier; nine-month yield was 2.12% versus 1.87%. Higher rates and loan growth helped, partly offset by higher funding costs, lower deposits and Global Markets activity.
- At September 30, total loans and leases were $1.05T, deposits $1.88T, total assets $3.15T and long-term debt $290.4B. Since December 31, 2022, deposits declined $45.7B while long-term debt rose $14.4B.
- Nine-month cash flows were $12.3B provided by operating activities, $28.8B provided by investing activities and $82.1B provided by financing activities. Cash and cash equivalents rose $121.5B to $351.7B; these banking cash flows reflect significant balance-sheet and funding movements.
- Credit metrics weakened: allowance for credit losses was $14.6B, up $418M from year-end; annualized net charge-offs were 0.35% of average loans in Q3 versus 0.20% a year earlier. Nonperforming loans and leases rose to $4.83B from $3.81B at year-end, primarily reflecting commercial real estate.
- Capital remained above regulatory minimums: CET1 was 11.9% under the binding Standardized approach. Average Global Liquidity Sources were $859B; average consolidated HQLA was $582B and the average liquidity coverage ratio was 116%. The company reported $327B of potential borrowing capacity against specifically identified eligible collateral.
Material changes and segment trends
- Q3 net income increased year over year, supported by higher net interest and noninterest income, but provision expense and noninterest expense also increased. The unusually low 3.6% Q3 effective tax rate (14.7% in Q3 2022) included tax-credit and discrete tax benefits; excluding these benefits, the reported underlying rate would have been 25%.
- Consumer Banking Q3 net income declined 7% to $2.9B as higher revenue was outweighed by credit provision and expense increases. Credit card balances and charge-offs rose; the nine-month consumer provision increased substantially.
- GWIM Q3 net income fell 13% to $1.0B, reflecting lower net interest income and higher expenses, partly offset by higher asset-management fees. Client balances reached $3.55T, aided by market valuations and positive client flows.
- Global Banking Q3 net income rose 26% to $2.6B, reflecting higher net interest income and a $119M provision benefit. Global Markets Q3 net income rose 17% to $1.2B on stronger trading revenue, partly offset by higher expenses.
- Nine-month revenue growth included a 26% increase in market-making and similar income, while fees and commissions declined, particularly service charges and investment and brokerage services. Other income remained negative, including partnership losses and AFS securities-sale losses.
Outlook, risks, contingencies and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management’s credit-loss outlook incorporated scenarios estimating a mild recession in late 2023 and early 2024, unemployment just above 5% by Q4 2024 and modestly improving conditions versus its year-end 2022 outlook.
- Credit risks include rising consumer card delinquencies and charge-offs and increased commercial real-estate office stress. Office loans were about 2% of total Corporation loans; approximately $8.7B were scheduled to mature by the end of 2024. Management said most remained adequately secured, while noting collateral-value declines and uncertain office demand.
- The FDIC’s proposed special assessment related to the failures of Silicon Valley Bank and Signature Bank could produce an estimated $1.9B noninterest expense if finalized as proposed. Timing and final amount were not established; recognition could occur in Q4 2023.
- Unrealized losses on HTM debt securities were $131.6B at September 30, 2023 (fair value $471.8B versus amortized cost $603.4B). AFS securities had $4.6B of gross unrealized losses. Interest-rate changes can affect securities values, accumulated OCI and capital.
- Proposed U.S. regulatory changes could alter risk-based capital, G-SIB surcharges, TLAC and eligible long-term debt requirements; the company was evaluating their impact. Its G-SIB surcharge was expected to rise 50 basis points on January 1, 2024.
- For disclosed litigation, regulatory matters and representations-and-warranties exposures, estimated possible loss above accrued liabilities was $0–$0.8B. The filing cautions that actual outcomes may differ; it also describes settlements requiring penalties and customer refunds in consumer-fee and credit-card marketing matters.
- Other stated risks include inflation, interest rates, economic and geopolitical uncertainty, deposit competition, cyber and operational disruption, regulatory changes and climate-related risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit outflows and customer migration to higher-yielding products continue, and how funding costs affect net interest income.
- Whether consumer credit-card delinquencies, charge-offs and allowance needs keep increasing.
- Developments in commercial real-estate office criticized loans, nonperformers, collateral values and upcoming maturities.
- The final FDIC special-assessment rule and resulting expense, as well as developments in litigation and regulatory matters.
- How proposed capital rules and the expected G-SIB surcharge affect capital requirements, distributions and buybacks.
- The effect of securities valuation changes and rate sensitivity on OCI, capital and earnings; also distinguish GAAP results from FTE and other non-GAAP measures.