BofA beats Q3 2017 estimates on 9% rise in net interest income

After recording a 12-month low of $22.74, the stock of Bank of America (NYSE: BAC) has recovered to $25 levels. Notably, legendary investor Warren Buffett’s Hathaway Inc. became the largest shareholder in August. Buffett had also praised Brian Moynihan, CEO of Bank of America, for the way he runs the bank. The Bank of America reported its fiscal 2017 third-quarter results last Friday.

Both revenues and earnings were better than analysts estimate. Similar to other major banks such as Citigroup and JP Morgan, the Bank of America reported a 22% decline in fixed income revenue. Still, considering the overall improvement in performance, we expect the stock of Bank of America to rally in the days to come. The stock ended Monday’s trading session at $26.24.

The Charlotte, North America-based bank reported Q3 2017 revenues of $22.079 billion, an increase of $217 million from $21.863 billion reported in the similar period last year. Analysts had expected the Bank of America to report revenues of $21.976 billion. Net income for the September quarter was $5.122 billion, compared with $4.452 billion in the same period of 2016. On a per share basis, Q3 2017 earnings of $0.48 were higher than $0.41 reported in Q3 2016. The Street analysts had expected Q3 earnings of $0.45 per share.

Bank of America

Segment wise, Consumer banking revenue increased 10% to $8.8 billion. Global Wealth and Investment Management revenue increased 6% to $4.6 billion. Global banking revenue was $5 billion, up 5% on y-o-y basis. Net interest income for the recent quarter was $11.20 billion, an increase of $960 million, or 9%, from last year. Notably, net interest margin increased to 2.36% in the quarter, from 2.23% a year ago.

Noninterest income was $10.7 billion, down $756 million from last year. Lower trading revenue and mortgage banking income, partially offset by higher asset management fees, resulted in a decline in non-interest income. Provision for credit losses was $834 million, down 2% from $850 million last year. Non-interest expense fell 3% ($342 million) to $13.1 billion, with reductions in both non-personnel and personnel expenses. The efficiency ratio improved to 60%, from 62% last year.

While loan balances increased 6% to $842 billion, deposits increased 4% to $1.27 trillion. The bank also reported a return on average common equity of 8.1%. It is the highest return on equity in six years. Reflecting an improvement in financial strength, the Bank of America finished third-quarter with a CET1 ratio of 11.9%, compared with 11% last year. The results undoubtedly mark a turnaround in operations. After facing issues for about a decade, the bank is back on a solid growth track, aided by cost cuts and higher interest rates. Thus, fundamentals favor a rally in the stock of Bank of America.

The stock is trading above its 50-period moving average and also near the major technical support level of 25. Further, the accumulation indicator is ascending. Thus, we expect a short-term bullish reversal in the stock.

We wish to invest in a high or above option to capitalize on the probable uptrend. A strike price of about $26 is ideal for the trade. We may select a date around October 25 for the expiry of the option.

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