Credit Improvement Drives Bank of America Corp (BAC) Earnings

Bank of America Corp (NYSE: BAC) continued the positive earnings momentum for big banks on Monday, reporting better-than-expected top- and bottom-line numbers in the third quarter. After nearly a decade of struggles following the 2008 financial crisis, analysts say Bank of America’s business finally seems to be on track.

Bank of America reported third-quarter adjusted earnings per share of 66 cents on revenue of $22.8 billion. Both numbers topped consensus Wall Street expectations of 62 cents and $22.6 billion, respectively. Revenue was up 4 percent compared to a year ago.

Non-interest expenses once again dropped by 2 percent, and the bank’s efficiency ratio improved to 57 percent. Bank of America also reported a record third-quarter pretax income of $9 billion.

BAC reported $929.8 billion in total loans. Consumer Banking loans were up 6 percent to $285 million, Global Wealth and Investment Management loans were up 5 percent to $162 billion, and Global Banking loans were up 2 percent to $353 million.

[See: 8 of the Best Stocks to Buy for the Rest of 2018.]

Net interest income was up 6 percent to $11.9 billion. Net interest margin was up 0.04 percent to 2.42 percent, slightly ahead of consensus estimates of 2.41 percent.

Provision for credit losses decreased by $118 million to $716 million after rising by $101 million in the second quarter. Analysts has expected an increase of $137 million.

“This marks the 15th consecutive quarter of positive operating leverage, driven by continued growth in deposits, client balances in wealth management, solid loan growth and disciplined expense management,” CEO Brian Moynihan says in a statement.

BAC stock initally traded higher by about 1 percent on Monday morning following the report, but then fell 2 percent shortly after the market opened. Investors have been disappointed that banks have struggled to expand NIM even as interest rates have begun to rise.

Moningstar analyst Eric Compton says NIMs will continue slowly trending in the right direction in the long term.

[See: 10 Value Stocks to Buy in an Unpredictable Market.]

“After spending billions of dollars to settle legal and regulatory issues and years reshaping its business, and with top management running an increasingly lean operation, the bank is finally generating acceptable returns for shareholders,” Compton says. “Our long-term rate projection remains intact, and we would expect overall net interest margins to increase at a reduced pace regardless, as competition picks up among banks.”

Morningstar has an “undervalued” rating and $29 fair value estimate for BAC stock.

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