The quarterly results for Bank of America (NYSE:BAC) were not perfect, but the valuation doesn't require spotless numbers. The large financial continues to trade below book value though the number grew nearly 10% for the year.
The first quarter is always the worst at BoA due to annual compensation expenses. The stock initially started trading down on the day, but the end result were decent gains following the JPMorgan Chase (JPM) rally induced from the previous day. As my previous research highlighted, the large disconnect in the stock make BoA worth chasing for several reasons.
The large financial took higher credit losses and lower noninterest income in stride. The lower trading revenues and higher credit losses hurt the numbers in comparison to last Q1, but BoA still generated $2.7 billion in net income for the seasonally weak quarter. The ability to lower operating expenses and grow net interest income from the rate hike provided crucial offsets for the weaker parts of the business.
BoA still has plenty of room with reducing expense levels. For Q116, the noninterest expenses were down 6% from last year levels to $14.8 billion. Even with the $1.0 billion cut from the expense lines, the large bank still has a rather high efficiency level of 73%. Further reducing expenses will help the bottom line.
Source: BoA Q116 presentation
While the bank increased the provision for credit losses by $232 million in Q1, the amount of nonperforming loans were actually down $1.9 billion from last year. Even the net charge-offs were down from last year leaving the charge-off ratio at only 0.48%.
This all leads to the catalyst that will eventually move the stock higher. Net interest income (NYSEMKT:NII) increased slightly from Q4 levels to $10.6 billion. Though the number was up $500 million from last Q1. The key though is that BoA saw the initial benefits from the Fed rate hike and is poised to benefit dramatically if the rate hike cycle continues. The bank estimates a $6.0 billion benefit to NII under a scenario where rates are hiked 100 basis points in a year.
Source: BoA Q116 presentation
Due to the financial crisis, the market continues to focus on credit exposures in the energy sector and other negatives related to banks. The market misses that BoA fought off these headwinds to grow the TBV to $16.17 at the end of Q1. So while the stock plunged during the quarter, the bank grew TBV by $0.55.
The key takeaway is that investors should have confidence in buying the shares of BoA on dips and even at the current price of slightly above $14. The bank has a big catalyst for higher income on rate hikes and continues to show the market it can protect the downside by easily absorbing the credit losses in the energy sector.
The recommendation remains to buy the bank now and continue buying BoA on any further dips, especially has the stock trades far below TBV.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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