Silver as an investment

Bank of America Beats Despite $2.9BN Tax Charge, $292MM Steinhoff Loss, 13% FICC Drop

Like JPMorgan, Wells and Citi before it, on Wednesday morning Bank of America reported adjusted EPS for the fourth quarter that beat the average analyst estimate: Adjusted Net Income was $5.3BN, equivalent to adjusted Q4 EPS of $0.47, 2 cents higher than the $0.45 expected. Unadjusted Net Income was $2.4 billion (EPS of $0.20) and included a $2.9 billion charge related to the Tax Cut and Jobs Act, as well as a $292 million charge related to the Steinhoff scandal.

Broken down, the tax charge consisted of:

  • $0.9B pre-tax charge related to the revaluation of certain renewable energy tax-advantaged investments, which was recorded in other income and generated offsetting impacts within tax expense
  • $1.9B tax expense principally associated with the revaluation of certain deferred tax assets and liabilities

Adjusted Revenue was $21.4 billion, just higher than the $21.3 billion expected.

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America’s second-biggest bank by assets, which for years was plagued by legal fees and lawsuits, posted revenue improvements at its consumer banking, wealth management and global banking businesses. On a full year basis, BofA reported net income growth across all segments except Global Markets, which declined by 14% Y/Y as a result of the ongoing slowdown in trading, largely in part due to a collapse in capital markets volatility.

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Notably, just like JPM and Citi before, it, BofA announced that its net charge-offs rose to $1.2 billion from $880 million, primarily driven by “a single-name non-U.S.commercial charge-off totaling $292 million” which has been said to be related to the Steinhoff scandal and bond plunge. Excluding the single-name charge-off, the net charge-off ratio was fairly consistent with the prior quarter, BofA said. Nonperforming loans (NPLs) decreased $0.1B from 3Q17, with 45% of consumer NPLs staying current. The bank’s provision expense of $1.0B increased $0.2B from 3Q; The Bank’s net reserve release of $0.2B in 4Q17 reflected “improvements in consumer real estate and energy.”

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Unlike its peer bank, however, Bank of America is seen as among the best-placed US banks to benefit from higher rates because of its mix of loans and liabilities. Net interest income rose $1.2bn, or 11 per cent, from a year ago, to $11.7 billion. It also increased $0.3B compared to 3Q17, “driven by growth in loans, deposits and investment securities balances as well as higher interest rates.” As a result, BofA’s NIM (which it calls Net Interest Yield), rose 16 bps from a year ago to 2.39%, more than the 2.37% expected.

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There was also a modest improvement in the bank’s balance sheet, with average loans and leases growing 2% Y/Y, to $928 billion, while total deposits increased by 3% to $1.294 trillion, up $22 billion on the quarter.

BofA “client activity was strong across all of our businesses in 2017,” with average deposits up 4% and average loan balances in business segments increasing 6%, CFO Paul Donofrio says in statement. “We delivered positive operating leverage by carefully managing expenses even as we continued to invest in new capabilities and technology that make it easier for our customers to do business with us… Our balance sheet remains strong and we believe we are well positioned for growth.”

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The bank also highlighted that Merrill Edge brokerage assets rose 22%, Mobile banking active users increased 12% to 24.2m and the Provision for credit losses increased $126 million, primarily driven by credit card seasoning, loan growth. The bank also flagged that $946m pretax valuation adjustment on renewable energy investments, which was offset by tax benefit from repricing related deferred tax liability (DTL); $1.9b income tax expense related to repricing of deferred tax assets (DTA) and DTL; 4Q results include $379m tax benefit from restructuring subsidiaries.

Cost-cutting at BofA also helped boost profits: the bank has been making an expense saving push under Brian Moynihan, chairman and chief executive. In the fourth quarter, noninterest expense ticked down another $139m, or 1% from a year ago, to $13.3BN. BofA reported that total headcount of 209K declined 1% from 4Q16, “as reductions from the sale of the non-U.S. consumer credit card business and declines in non-sales professionals in Consumer Banking offset growth of nearly 2.2K primary sales professionals across Consumer Banking, GWIM and Global Banking.”

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On the all important, for margins, global markets side, BofA reported trading revenue excluding DVA of $2.66b higher than the estimated $2.51Bn. FICC trading revenue excluding DVA was $1.71b also better than the est. $1.65b. Still, FICC revenue declined 13% from 4Q16, driven by lower volatility and client activity across macro products, particularly rates products.

Equities trading revenue excluding DVA $948m vs est. $868.8MM. As BofA said, “Equities revenue of $0.9B was flat to 4Q16, reflecting growth in client financing activities, offset by a decline in cash and derivatives trading due to low levels of market volatility.”

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The stagnant nature of the bank’s trading revenue stream is shown in the charts below.

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Within markets, BofA also flagged that average total assets increased from 4Q16, primarily due to targeted growth in client-financing activities in Equities, while the average VaR was $36MM in 4Q17, flat compared to 4Q16.

Meanwhile, noninterest expense increased 5% versus 4Q16, as lower revenue-related incentive costs were offset by continued investments in technology.

The bank summarized its 2017 key takeaways as follows:

  • Average deposits grew $47B, or 4%, from 2016
  • Average loans and leases in business segments grew 6% from 2016
  • Wealth management client balances increased to nearly $2.8T with AUM flows of $96B
  • Lowered expenses while continuing to invest in the franchise
  • Increased capital returned to shareholders; repurchased $12.8B of common shares and paid $4.0B in common dividends
  • Expect to benefit from higher interest rates and a lower U.S. corporate tax rate

Full earnings release below (link)