Business context and reporting period
Bank of America Corporation is a U.S. bank holding company with four reportable segments: Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets; remaining activities are reported in All Other. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Balance-sheet comparisons are primarily with December 31, 2017. At quarter-end, the company reported $2.34 trillion in assets and approximately 205,000 employees.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $11.87B | $11.16B | $35.13B | $33.21B |
| Noninterest income | $10.91B | $10.68B | $33.38B | $33.71B |
| Total revenue | $22.78B | $21.84B | $68.51B | $66.92B |
| Provision for credit losses | $716M | $834M | $2.38B | $2.40B |
| Noninterest expense | $13.07B | $13.39B | $40.25B | $41.47B |
| Net income | $7.17B | $5.42B | $20.87B | $15.87B |
| Diluted earnings per share | $0.66 | $0.46 | $1.91 | $1.36 |
- Returns and margins: Q3 return on average assets was 1.23% (0.95% a year earlier); return on average common equity was 10.99% (7.89%). The efficiency ratio improved to 57.37% from 61.33%. Net interest yield on an FTE basis was 2.39%, up from 2.36%.
- Balance sheet at September 30: Loans and leases were $929.8B, deposits $1.346T, total assets $2.339T, and shareholders’ equity $262.2B. Long-term debt was $234.1B. Loans and equity were down from year-end 2017, while assets and deposits increased.
- Cash flow, nine months: Operating activities provided $53.4B; investing activities used $47.2B; financing activities provided $22.6B. Cash and cash equivalents increased $27.4B to $184.9B. These cash-flow figures reflect banking balance-sheet activity and should be considered alongside liquidity disclosures.
- Capital and liquidity: CET1 was 11.4% under the Standardized approach and 11.5% under Advanced approaches; the Tier 1 leverage ratio was 8.3% and SLR 6.7%. The company said it met the well-capitalized definition. Average global liquidity sources were $537B and average consolidated LCR was 120% for the quarter.
- Credit quality: Allowance for credit losses was $10.5B, down from $11.2B at year-end 2017; allowance for loan and lease losses was 1.05% of loans, versus 1.12%. Nonperforming loans and leases were $5.15B, down from $6.47B. Annualized net charge-offs were 0.40% of average loans for Q3.
Material changes versus prior periods
- Q3 net income rose $1.7B year over year; nine-month net income rose $5.0B. Management attributed the improvement principally to lower income tax expense following the Tax Act’s reduction of the federal corporate rate from 35% to 21%, as well as higher net interest income and lower expenses. Lower credit provisions also helped Q3 results.
- Net interest income increased on higher rates and loan and deposit growth, partly offset by tighter spreads. Interest expense also rose, including deposit expense, which increased to $1.23B in Q3 from $624M.
- Q3 noninterest income increased modestly; nine-month noninterest income declined. Investment banking income fell 18% in Q3 and 13% year to date, with lower leveraged-finance and advisory fees. Trading activity was mixed: nine-month Global Markets sales and trading revenue excluding DVA increased, led by equities, while FICC revenue declined.
- Expenses declined, mainly from lower litigation and other general operating costs; the nine-month comparison also benefited from a $295M data-center impairment charge in 2017. The efficiency ratio improved.
- Credit indicators generally improved in commercial and consumer real estate portfolios, including energy exposures. U.S. credit card charge-offs increased: Q3 net charge-offs were $698M versus $612M a year earlier, reflecting portfolio seasoning and loan growth.
- Shareholders’ equity fell $5.0B from year-end, primarily from repurchases, dividends, market-value declines in debt securities and preferred-stock redemption, partly offset by earnings and preferred-stock issuance. Accumulated OCI was negative $14.8B versus negative $7.1B at year-end, largely reflecting debt-security valuation changes.
Outlook, commentary, risks and unusual items
- Management expected an approximately 20% effective tax rate for 2018, absent unusual items. The filing does not provide a clear quantified full-year earnings or revenue forecast.
- The Board authorized approximately $20.6B of common-stock repurchases for July 2018 through June 2019; $5.0B was repurchased in Q3. The quarterly common dividend was raised to $0.15 per share from $0.12 earlier in 2018.
- Management described the company as asset-sensitive to parallel interest-rate changes. Its estimated next-12-month pretax net interest income impact was +$2.93B for an instantaneous +100-basis-point parallel shift and -$4.26B for a -100-basis-point shift, assuming no response by the company and other stated modeling assumptions. Deposit repricing and customer movement to higher-cost products could reduce benefits from rising rates.
- Unusual items included a $729M nine-month charge related to redemption of trust preferred securities; $656M of gains on sales of primarily non-core loans; and a $793M prior-year gain on sale of the non-U.S. consumer credit card business. Q3 also included an $84M gain on a non-core consumer real-estate loan portfolio sale.
- Legal and regulatory matters remain uncertain. The representations-and-warranties reserve was $2.0B. For certain matters where a loss range could be estimated, management disclosed possible aggregate losses of $0 to $1.2B in excess of related accrued liabilities, if any; this is not the company’s maximum exposure. Management said pending matters were not expected to materially affect consolidated financial position or liquidity, but adverse outcomes could materially affect results or liquidity in a particular period.
- Other stated risks include economic and market volatility, higher rates and funding costs, tariffs and geopolitical conditions, U.K. withdrawal from the EU, cyber and operational failures, regulatory capital and liquidity changes, credit losses, litigation, and the company’s ability to meet expense and net-interest-income expectations. The filing also says the 2020 expected-credit-loss standard is expected to increase the allowance and reduce retained earnings; the amount depends on portfolio and economic conditions at adoption.
Important facts for investors to verify
- How much of the earnings improvement is attributable to the lower tax rate versus recurring operating growth; compare reported results with the approximately 20% tax-rate outlook.
- Whether deposit costs continue to rise faster than asset yields, and whether actual net interest income tracks management’s rate-sensitivity scenarios.
- Whether rising U.S. credit-card charge-offs and portfolio seasoning lead to further reserve builds or higher credit costs.
- The scale and timing of repurchases, dividends and other capital distributions relative to CET1, SLR, liquidity and regulatory requirements.
- Developments in litigation, representations-and-warranties claims, regulatory proceedings and the disclosed possible loss range, noting that the range is not maximum exposure.
- The effects of market-value declines in securities on accumulated OCI and regulatory capital, and the eventual impact of the expected-credit-loss accounting standard.