On Wednesday, Bank of America (BAC) announced its earnings results for the last quarter and the full-year. The company reported net income of 29 cents per share on revenues of $21.7 billion for the quarter against analyst estimates of 26 cents and $21.2 billion. For the full-year, Bank of America generated $89.80 billion in revenues and $0.90 per share in net earnings, beating estimates both in top line and bottom line.
The results compare nicely with last year's results. Last year, Bank of America generated $18.89 billion in revenues and 3 cents per share in net income for the fourth quarter, and it generated $84.23 billion in revenues and 25 cents per share in net income for the full-year. The company was able to grow its revenues and net income greatly since last year and it is well on its track to achieve its long-term goals.
The bank showed improvements in many different metrics it tracks and it showed a lot of promise for the future. For example, the bank's performance improved greatly from last year as its return on assets increased from 0.19% to 0.53%, return on common shareholders' equity rose from 1.27% to 4.62%, return on average tangible shareholders' equity rose from 2.60% to 7.13%. Bank of America always had a lot of assets but the bank was not always good at utilizing those assets to maximize its gains. It looks like the company is getting a lot better at turning its assets into income, which is great for the investors.
The bank also did a good job in cost-cutting. Despite seeing an increase in litigation charges, Bank of America's non-interest expenses continued to fall in 2013 compared to 2012. Last year, the bank's non-interest expenses totaled $69.2 billion, down from $72.1 billion in 2012. Excluding litigation charges, Bank of America's non-interest expenses were down from $67.9 billion to $63.1 billion, an improvement of 7%.
During the year, the company also reduced its provision for credit losses from $8.17 billion to $3.56 billion. This shows that the company has much more confidence in the economy as well as the quality of credit it extends; thus, it expects to see much less of a credit loss risk. This trend will probably continue in 2014 and for the foreseeable future as the global economy continues to improve.
Bank of America's capitalization improved greatly during the year. In 2010, the bank's Tier 1 Common Capital Ratio was 8.60%, followed by 9.86% in 2011, 11.06% in 2012 and 11.19% in 2013. Anything above 4% is considered "adequately capitalized" and ratios above 6% are considered "well-capitalized" as long as a bank doesn't pay large dividends that may bring their ratio below this level. At the moment, Bank of America's capitalization level is very healthy and we may see a dividend increase in the near future if all goes well.
Even though interest rates are at historically low levels, Bank of America saw its customer deposits reach a record level. This is even more impressive when we consider that the bank reduced its interest payments by 8 base points compared to the fourth quarter of 2012, while increasing the amount of customer deposits. Also, keep in mind that the bank now has 5,151 active branches, down 6% from the number of branches at the end of 2012. During this period, Bank of America was able to encourage many of its customers to use mobile banking rather than visiting branches in an effort to cut costs. Mobile banking was up 20% in 2013 (to 14.4 million active users) as a result of this initiative. The bank added 3.9 million new consumer cards which represents the highest value since the beginning of the Great Recession 6 years ago, and its brokerage assets rose 26% year to year (currently right below $100 billion), supported by a strong stock market performance. Currently, many Bank of America branches are also acting as mortgage originators, and this move increases each branch's utility for the company. As of the end of 2013, 54% of Bank of America's mortgage loan officers are based in the company's bank branches and this number will be increasing this year and the next.
During the year, Bank of America's net interest yield rose from 2.35% to 2.47% and the company's efficiency ratio fell from 85.59% to 77.07% (keep in mind that efficiency ratio represents a bank's overhead over its revenues and lower values indicate better performance). The bank is definitely taking advantage of the low-interest environment and improving its efficiency.
Bank of America's book value rose from $20.24 to $20.71. This may not represent much of an increase; however, the bank still trades below its book value, which means that as long as it continues to get more efficient with utilizing its assets, there will be always upside for the investors. Bank of America used to trade for values far below its book value because many investors were worried about the bank's efficiency and profitability; but these worries are going away as the company continues to show a lot of progress.
What to do with the shares
As the company and its managers are proving themselves once again, investors should probably hold onto their shares. It would not be unfair to expect Bank of America to trade at values closer to its book value in the near future. Also, as the bank's capitalization continues to improve, I would expect some meaningful dividend increases. Bank of America is well-positioned to take advantage of a recovering global economy and the company is learning how to maximize the utility of its massive assets. Once the company deals with its litigation charges and puts them behind itself, there will not be that much that can hold the shares down any longer. As long as the execution continues on, Bank of America will continue to be one of the better investments for 2014.