Bank of America's (BAC) earnings announcement failed to please the market resulting in a 5% decrease in the stock price. The bank announced earnings of $0.2 per diluted share, a substantial improvement over the last quarter of 2012 when it reported earnings of $0.03 per share. However, the increase in earnings fell short of the market expectations and caused the fall in price. While the earnings announcement did not meet the expectations; there were still some positives for Bank of America that indicate better than expected future performance.
Improving Net Interest Margin
The net interest margin for Bank of America has improved to 2.43% in this quarter as compared to 2.35% in the last quarter and 2.21% in the first quarter of 2012. There was also a substantial improvement in asset quality resulting in reduced credit loss provisions to $1.7 billion this quarter from $2.2 billion in last quarter of 2012. The bank has reported a net income of $2.62 billion, a sizable improvement over the last four quarters. Expense cuts are visible through a decrease in full time employees; however, the affect of these measures have not been clearly visible in financial performance.
The key to the quarter's improved income is a substantial growth in non interest income due to improvement in trading income and income from investment and brokerage services. Merrill Lynch has served as the source of profit improvement and the total revenue has improved from $18.7 billion in the last quarter to $23.5 billion. The dependence on one segment of the business increases risk and also poses questions about the performance of other segments. The mortgage segment appears to have shown a decent performance by reporting income of $1.2 billion as compared to a loss of $540 million in the previous quarter. Performance of other segments has remained sluggish submitting to the trends in the industry.
Recovering Banking Sector?
According to Bloomberg, banks are expected to report increase in profits averaging at approximately 31%. This increase, however, is not supported by a boost in the industry's growth. On the contrary, the banking industry is faced with some tough circumstances which include strong regulatory pressures, among other factors, which continue to limit sales growth. Estimates suggest that first quarter's revenue growth for banks could be as low as 2%. As a result the banking industry seems to have been competing on the basis of cost reductions. The whole industry, specifically the larger banks seem to have reported profits by a thorough process of expense cuts. Bank of America, along with JP Morgan (JPM), Citigroup (C) and Wells Fargo (WFC) has also used reserve releases to support their reported earnings.
As the industry is globally integrated, the revenue growth remained sluggish due to risk factors associated with the global economy. The European market has shown a slowdown which has caused a sizable reduction in revenue growth for the banking industry. Other than the economic situations, concerns regarding the fixed income market of the continent have also emerged over the introduction of new rules.
Recent Fall, a Good Opportunity to Buy?
The 5% decrease in the stock price provides a good entry point for long-term investors. The bank operates at a P/E ratio of 13.4 as compared to the industry average of over 30. It is currently trading at 57.4% of its book value of 20.3. Furthermore, the stock repurchase is still on the table, providing a reliable prospect of a boost in the stock price. Going forward, the bank will require an improvement in sales revenues, which is expected to come from cross selling between different segments. This is a very effective strategy as revenues are improved without incurring the costs of reaching out to new customers.
The current year is likely to be a difficult one for the banking industry as the constraints in revenue growth are expected to persist. In this period, the industry's profitability will be highly sensitive to the current trend of expense reduction. Similarly, for Bank of America, the performance of Merrill Lynch will be necessary for the sustenance and growth of profits through this difficult period. In 2014, however, the outlook appears brighter as it introduces the prospects of growth in revenues, making Bank of America an attractive opportunity for investors at the current price level.