Bank of America (NYSE:BAC) reported much better than expected earnings this morning, beating analyst expectations for the quarter. The stock is selling off as I write this, down over two percent, but I'll argue here that this reaction makes no sense as BAC's long case was further strengthened by this morning's report. We'll do a quick check of why BAC's fundamental case is stronger this morning than it was yesterday and review BAC's earnings report for signs of life in the beaten down bank.
Shares have traded up in sympathy over the past couple of sessions because of strong reports from competitors Citigroup (NYSE:C), JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS). Thus, bears will say the good quarter was priced into shares. However, I find this to be shortsighted because we know BAC shares are significantly cheaper fundamentally than those other financials, excluding Citi. Thus, the idea of a good quarter being priced in makes no sense. While this is annoying for longs, it also presents opportunity for those with an investment timeframe longer than a day or two.
So why should we see today's selloff as an opportunity? There are a lot of really good developments that came from this morning's report. First, the bank settled with AIG (NYSE:AIG), getting that litigious monkey off of its back. The settlement was relatively small in comparison to some other blockbusters that have taken place recently, but having this $650 million expense settled and in the past will allow shareholders to move on from yet another equity drain. Removing uncertainty from future earnings is always a good thing and we have a bit more clarity now that this matter has been settled.
Second, tangible book value improved markedly to $14.24 from $13.81 at the end of the first quarter. That is a very nice 3.1% gain in tangible book value in only three months, or over 12% annualized. Regardless of your feelings on the stock, that is a robust growth rate in tangible book value and further proof that the bank has tremendous potential to create substantial shareholder value. It also means that BAC is now even cheaper on a tangible book basis, as the stock is trading for only 1.09 times tangible book at present, discounting nearly all of BAC's future earnings.
Third, BAC has now converted 15.5 million customers to its mobile platform, further reducing the need to pay for costly branches. Branches have declined to just over 5,000 as of the end of the quarter and this has helped BAC save enormous amounts of non-interest expense. In addition, mobile customers are more likely to interact with BAC on a regular basis through their devices than a traditional customer who only interacts at the physical branch. Mobile banking is the future of the industry and BAC spends a lot of money to ensure it can compete; this quarter is further validation that this strategy is working.
Fourth, Project New BAC is still paying dividends and in fact, the ultimate goal in cost savings for New BAC will be achieved by the end of this year instead of the middle of next year, a full two quarters ahead of schedule. As part of this, BAC has seen FTE employees slip by 24,000 over the past year, saving roughly $3 billion in annual costs, assuming BAC's average employee expense of around $125K annually. These are recurring cost savings that will add value for years to come and in total, BAC saw non-interest expense, excluding litigation, fall 6% in the quarter.
BAC's second quarter was terrific in comparison to expectations and if it weren't for never ending litigation, BAC shares would be off to the races. The idea that this quarter was somehow priced in is ridiculous, as the fundamental picture continues to improve for BAC with each report. There was a lot to like in this report, more so than some other recent quarters. The positives far outweigh the negatives and contending that the quarter was priced in ignores the enormous strides BAC is making for the long term.
Disclosure: The author is long BAC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.