All You Really Need To Know About Bank Of America

| About: Bank of (BAC)


Q3 earnings are out and I discuss the results.

I analyze and consider the changes in several key metrics.

Buy rating.

I will get right to it. And this is all you really need to know. When it comes to Bank of America (NYSE:BAC), it's about the performance. Performance not just on the top and bottom lines but also in several key metrics that I follow closely for all major banks. The bank has come a long way from it facing extinction, and it took we the people to keep it alive. Today Bank of America is one of the largest banks in the United States by assets and yes, it has recovered from the Great Recession. Is it firing on all cylinders like it was pre-recession? No, unfortunately it is not. The stock has ebbed and flowed but it has come back from the brink. The bank is set up to do well in the coming years especially in light of the forthcoming interest rate hikes by the Fed. I am behind Bank of America long-term. I think it is set for growth and in turn, the stock should provide decent returns. But to know if now is the time you should be pulling the trigger, we need to examine the company's most recent earnings and key metrics.

As you know, I care most about a growing loan and deposit record, a decent efficiency ratio, as well as of course revenues and earnings. But on top of that, we also need to be aware of toxic or non-performing assets. These metrics can give us an indication of where the bank is heading, and can help us separate the strong from the weak in the sector. Now look, Bank of America is massive and while it is true that it will benefit from rising rates, slow and steady growth is most desirable from a bank of this size. So just how is the company doing?

In the most recent quarter, the bank saw a top line and bottom line number that beat analyst estimates. The quarter was pretty decent overall. Revenue was $21.6 billion, up 3.1% year-over-year. It was nice to see the company break a trend of year-over-year declines. With this rise, revenue also beat expectations by a hefty $700 million. The company also saw a bump in earnings which is a plus. Last year, the company saw earnings per share of $0.38 per share, or $4.6 billion. Here in the present quarter net income jumped to $5.0 billion and earnings per share increased 8% to $0.41. I will point out that this was a nice beat versus expectations of $0.08. Of course, the headline numbers only tell part of the story, so what drove these results?

The answer lies in the bank's net interest income and non-interest income, two of the biggest sources of cash for the company. Net interest income was $10.2 billion up 3% from the $9.9 billion in Q2 2015. Non-interest income was also up year-over-year. It came in at $11.4 billion. This is up versus the $11.1 billion last year. On a real positive note, another 1.32 million credit cards were issued, which bodes well for future potential interest income as well as fees generated from the card.

One of the most under-appreciated, yet critical metric to look at, is the efficiency ratio. But for whatever reason, still so many opinion makers ignore it. That is a mistake in my opinion. I will remind you that the efficiency ratio measures the costs expended to generate a dollar of revenue. The efficiency ratios in each of the business segments improved year-over-year. The highest efficiency was in Global Banking, where the ratio was 45%. The worst ratio was in Global Wealth and Investment Management, where it was 74%. Still, the metrics are improving across the board and I will continue to closely monitor these stats.

Another major indicator to look for improvements is in loan and deposits. That is simple banking. That said, we need to see loan and deposit growth. On this front, the bank is doing well. Loans were up across the board, rising to $905 billion in the quarter, up from $903.2 billion just last quarter. Total average deposits were up year-over-year. They rose to $1.25 trillion in Q3 2016, from $1.15 trillion last year. Finally, we need to be aware of non-performing assets. I was pleased to see that non-performing loans decreased to $8.73 billion, down from $8.8 billion last quarter and down from almost $10.3 billion in Q3 2015.

All things considered, it is the fundamentals that you need to know. And the key metrics are solid. With interest rates rising into the future, it can only help net interest income longer-term. The largest banks stand to gain. The improvement has been quite drastic compared to the start of the present decade. I am pleased with the improving efficiency ratio, which I will be watching very closely this year. Further, both loans and deposits continue to grow. The declining non-performing assets this year is also a key result. I maintain a buy rating on Bank of America for the long-term.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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.