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Why is Bank of America (BAC) down 5.8% since its last earnings report?

A month has passed since Bank of America’s (BAC) last earnings report. Shares have lost about 5.8% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Bank of America due for a breakout? Before we dive into the recent reaction from investors and analysts, let’s take a quick look at the company’s most recent earnings report in order to get a better handle on the important factors influencing the situation.

BofA’s first-quarter earnings beat the result thanks to loan growth and higher interest rates

Loan growth and higher interest rates pushed Bank of America’s first-quarter 2019 earnings of 70 cents per share, beating the Zacks Consensus Estimate of 65 cents. Moreover, this number increased by 13% compared to the previous year’s quarter.

The increase in net interest income (driven by higher interest rates and decent loan growth) largely supported the result. In addition, operating costs recorded a decline.

As expected, investment banking performance was weak as equity and debt revenues fell and advisory fees rose. Additionally, equity and fixed income trading was dismal, leading to a decline in trading revenues. In addition, card fees and deposit handling fees have decreased.

Additionally, loan loss provisions increased during the reported quarter.

The overall performance of the company’s business segments in terms of net profit generation was decent. All segments, except Global Markets and others, recorded an increase in net profit.

Lower transactions, investment banking hurts revenues, reduces expenses

Net revenues were $23 billion, slightly ahead of the Zacks Consensus Estimate of $23.2 billion. Additionally, the reported number decreased slightly year-on-year.

Fully taxable net interest income increased 5% year-over-year to $12.5 billion, driven by higher interest rates and growth in loans and deposits. Additionally, the net interest yield increased by 9 basis points (bps) to 2.51%.

Noninterest income fell 6% from the year-ago quarter to $10.6 billion. The decline was mainly due to lower fees and commissions and a decline in income from trading accounts.

Non-interest expenses were $13.2 billion, down 4% year-over-year.

The efficiency ratio was 57.10%, compared to 59.61% in the same quarter last year. A decrease in the efficiency ratio means an improvement in profitability.

Credit Quality: Mixed

The provision for credit losses increased 21% year-over-year to $1 billion. Additionally, net charge-offs increased 9% to $991 million, primarily due to growth in its commercial and consumer credit card portfolio.

However, as of March 31, 2019, the non-performing asset ratio was 0.55%, a decline of 17 basis points.

Strong capital position

The company’s book value per share at March 31, 2019 was $25.57, compared to $23.74 at March 31, 2018. Actual book value per share at the end of the first quarter was $18.26, compared to $16 .84 USD a year earlier.

At the end of March 2019, the company’s Common Equity Tier 1 (Basel 3 fully implemented) ratio (advanced approach) was 11.9%, compared to 11.3% at March 31, 2018.

Share an update on the buyback

BofA repurchased $6.3 billion worth of stock during the reported quarter.

Perspectives

The company expects NII in the second quarter of 2019 to be negatively impacted by higher financing of customer operations in global markets due to the European dividend season. Moreover, the benefits of credit growth and one extra day of interest will likely be offset by year-end credit card balance repayments and higher prepayments on mortgage-backed securities.

Additionally, NII is expected to benefit in the second half of the year from growth in loans and deposits and an additional interest day in the third quarter. Management expects NII to grow by almost 2% in 2019, based on the assumption of a flat yield curve, no increase in interest rates and moderate growth in loans and deposits.

Net interest yield is expected to decline slightly in the second quarter given the unfavorable impact of the above-mentioned factors on the quarter.

In 2019, the growth rate of core loans is expected to be low, to single digits.

Operating costs in 2019 and 2020 are projected to be close to the level of the reclassified year 2018 (on a basis).

Net charge-offs (NCO) are expected to remain approximately $1 billion in each of the remaining quarters of 2019, assuming no changes in current economic conditions. In addition, reserves are expected to approximately match the size of non-commissioned officer reserves in sync with credit growth.

The effective tax rate (excluding unusual items) is expected to be approximately 19%.

How have estimates changed since then?

Last month, investors saw a downward trend in new estimates.

VGM results

Currently, Bank of America has an average Growth Score of C, but its Momentum Score is performing much better at A. Plotting a somewhat similar path, the stock was given a B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has a Total VGM Score of B. If you’re not focused on one strategy, this score should interest you.

Perspectives

Estimates for this company are generally on a downward trend, and the magnitude of these revisions indicates a downward shift. Notably, Bank of America has a Zacks Rank #3 (Hold). We expect a linear rate of return on the stock over the next few months.

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