BANK OF AMERICA CORP quarterly report, Q2 FY2017

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Bank of America Corporation — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. Bank of America reported results across Consumer Banking, Global Wealth & Investment Management, Global Banking, Global Markets and All Other. Unless stated otherwise, income-statement comparisons are with the same 2016 period; balance-sheet comparisons are with December 31, 2016.

Financial performance and position

  • Q2 revenue: $22.8 billion, up 7% year over year; net interest income was $11.0 billion, up 9%, and noninterest income was $11.8 billion, up 6%.
  • Q2 earnings: Net income was $5.27 billion, up 10%; diluted EPS was $0.46, versus $0.41. Net income applicable to common shareholders was $4.91 billion.
  • Six-month results: Revenue was $45.1 billion, up 7%; net income was $10.1 billion, up 23%; diluted EPS was $0.87, versus $0.68.
  • Profitability and efficiency: Q2 return on average assets was 0.93%, return on average common equity was 8.00%, and the efficiency ratio was 60.13%, improved from 63.38%. FTE net interest yield was 2.34%, up 11 basis points. FTE measures are non-GAAP.
  • Credit costs: Q2 provision for credit losses was $726 million, down from $976 million. Net charge-offs were $908 million; annualized net charge-offs were 0.40% of average loans. The allowance for credit losses was $11.6 billion, and nonperforming loans, leases and foreclosed properties totaled $7.1 billion.
  • Balance sheet: Total assets were $2.25 trillion; loans and leases were $916.7 billion; deposits were $1.263 trillion. Total shareholders’ equity was $271.0 billion.
  • Debt and liquidity: Long-term debt was $223.9 billion, up from $216.8 billion at year-end. Global Liquidity Sources were $514 billion, including $86 billion at the parent company and NB Holdings. Average consolidated net HQLA was $425 billion; the company said it and its insured depository institutions were above 2017 LCR requirements. Parent-company time-to-required funding was 49 months, versus 35 months at year-end.
  • Capital: Basel 3 transition common equity tier 1 ratio was 11.6% under the Advanced approaches and 12.3% under the Standardized approach. The corporation reported that it met the definition of “well capitalized” under current requirements.
  • Cash flows, six months: Operating activities used $3.0 billion, compared with $26.2 billion provided in 2016; investing activities used $24.2 billion, versus $30.5 billion; financing activities provided $36.7 billion, versus $13.9 billion. Cash and cash equivalents increased $11.0 billion to $158.7 billion.

Material changes and business drivers

  • Higher rates and loan growth lifted net interest income and yield. Management described the balance sheet as asset-sensitive to rising rates; its modeled 12-month pretax net interest income impact was positive $3.2 billion for an instantaneous parallel 100-basis-point increase, and negative $2.7 billion for a 50-basis-point decrease. The analysis assumes no management response or change in deposit mix.
  • Lower credit provision reflected improvement in consumer real estate and reduced energy exposure. However, Consumer Banking’s six-month provision increased, mainly with U.S. credit-card seasoning and loan growth.
  • Global Banking Q2 net income rose to $1.8 billion, supported by higher revenue and lower credit provision. GWIM net income rose to $804 million, with client balances of $2.62 trillion, supported by market valuations and positive flows.
  • Global Markets Q2 net income declined 25% to $830 million as trading revenue weakened, particularly in fixed-income, currencies and commodities. Six-month net income was $2.13 billion, roughly flat year over year.
  • Noninterest expense rose 2% in Q2 to $13.7 billion. It included a $295 million impairment charge related to data centers being sold; higher FDIC expense was partly offset by lower litigation expense.
  • The June 1 sale of the non-U.S. consumer credit-card business generated $793 million pretax gain, $690 million tax expense and $103 million after-tax gain. Cash proceeds were $10.9 billion; the sale also improved transitional Basel 3 CET1 by 11 basis points under Advanced and 15 basis points under Standardized approaches.

Outlook, capital actions and risks

  • The filing provides no specific earnings or revenue guidance. Management noted continued U.S. economic growth and a healthy labor market, while inflation remained low and the Treasury yield curve flattened. It cited uncertainty around Brexit, foreign economies, rates, currencies and market conditions.
  • After Federal Reserve non-objection to the 2017 CCAR plan, the board authorized up to $12.9 billion of common-stock repurchases from July 2017 through June 2018, including about $900 million to offset equity compensation. The board declared a quarterly dividend of $0.12 per share, payable September 29, 2017. These were post-quarter actions; Q2 dividend paid was $0.075 per share.
  • The holder of Series T preferred stock stated its intention to exercise warrants for 700 million common shares using the preferred stock to satisfy the exercise price. The filing says the conversion was already reflected in diluted EPS calculations.
  • Litigation and contingencies: Unresolved mortgage repurchase claims were $17.6 billion; related representations-and-warranties liability was $2.2 billion. Management estimated reasonably possible losses of up to $2 billion above that accrual. For certain other litigation matters, the estimated aggregate possible loss was $0 to $1.5 billion above accrued liabilities, where estimable. Management cautioned actual outcomes could differ materially.
  • Other key risks include credit losses, interest-rate and market volatility, regulatory capital and liquidity changes, cyber and operational events, litigation, and effects of the U.K.’s planned EU exit. The filing also notes that the new expected-credit-loss standard, effective in 2020 unless adopted early, is expected to increase the allowance and reduce retained earnings at adoption.

Important facts for investors to verify

  • How much of earnings growth came from recurring operations versus the credit-card sale gain, tax effects and the data-center impairment.
  • Whether expense growth, including technology, FDIC and incentive costs, is consistent with management’s efficiency objectives; no specific expense target is stated in the provided filing text.
  • Credit-card seasoning and charge-offs, and whether improvement in consumer real estate and energy credit quality continues; review allowance coverage alongside portfolio changes.
  • Execution and capital impact of the $12.9 billion repurchase authorization, the higher dividend and the potential Series T warrant exercise.
  • Exposure to unresolved mortgage claims and litigation, including the possible losses above recorded accruals and the indemnity for payment-protection-insurance exposure from the sold card business.
  • Liquidity and capital sensitivities to market stress, regulatory changes and interest-rate scenarios; fully phased-in Advanced capital estimates assume regulatory approval of the internal models methodology, which had not been granted as of June 30, 2017.
  • Interpret cash-flow trends in the context of bank balance-sheet activity; operating cash flow was negative despite higher net income. Compare cash-flow disclosures with funding, securities-financing and liquidity metrics.