Bank Of America: The Numbers (Still) Tell A Good Story

Summary

• Bank of America recently reported strong Q3 2019 results that beat the top- and bottom-line estimates.
• Bank of America is operating in a challenging environment, but I believe that investors should keep banking on this large financial institution.
• Bank of America is my largest position, and I plan to stay long the stock.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

Bank Of America's (NYSE:BAC) stock has performed well so far in 2019, as BAC shares have significantly outperformed the broader market over the last 10+ months.

Source: YCharts

I have been long BofA for awhile now, but, in my opinion, BAC shares currently look more attractive than they have in years. While the large U.S. banks are definitely contending with a tough/challenging operating environment, I believe that BofA is still worthy of investment dollars, even above $30 per share.

It also helps that BofA's most recent quarterly results show that the bank's long-term story remains intact.

The Latest, The Q3 2019 Results Tell A Good Story

On October 16, 2019, BofA reported Q3 2019 financial results that beat the top- and bottom-line estimates. The bank reported Q3 2019 adjusted EPS of $0.75 (beat by $0.07) on revenue of $22.8B (beat by $70M), which also compares favorably to the year-ago quarter.

Source: Q3 2019 Earnings Slides

Highlights from the quarter:

• Strong return metrics: return on assets and return on equity of 1.23% and 11.2%, respectively (both are ex the material non-cash impairment - more on this below)
• Strong results for its Consumer Banking (net income up 5%, loans up 7%, and deposits up 3%), Global Wealth Investment Management (net income up 8%, loans up 5%, and deposits up 7%), and Global Banking (net income up 3%, loans up 7%, and deposits up 7%) divisions
• Bought back $7.6B worth of common shares during the quarter and its book value increased by 11% YoY (to $26.96)

The analysis excludes the previously announced JV non-cash impairment, which, in my mind, should be viewed as a one-time hit. Anyhow, BofA reported solid operating results and was able to hold expenses (and its efficiency ratio) steady when compared to the last few quarters.

Additionally, there have been a lot of discussion about the impressive progress BofA has made in the digital space, and rightfully so. The digital numbers across the board have trended from the lower left to the upper right over the last few quarters, and Q3 2019 was no exception.

Source: Q3 2019 Earnings Slides

Anyway you slice it, I believe that BofA's Q3 2019 results tell us this story: this bank is properly positioned to benefit from any improvement in the economy, but the bank will also be able to maintain if the operating environment remains challenged (i.e., low interest rate environment, trade war concerns, recession fears). I say this because BofA continues to show the ability to report strong operating results, improve its operating leverage, and grow its asset base during a period of time where the financial sector faces several significant headwinds.

Broader Market Concerns

The broader market has been volatile over the last few quarters, as macro concerns have taken center stage. To this point, Fidelity recently reported on the belief that the U.S. is in the late stages and that several key indicators were not promising from an economic activity standpoint.

Source: Fidelity's Q4 2019 Quarterly Market Update

Looking back, the financial sector has been under pressure for several reasons, but, in my mind, the risk factor that gets highlighted the most by pundits is the low (and weakening) interest rate environment.

Source: fred.stlouisfed.org

The pressures from the interest rate environment are already being felt as the bank's net interest yield continued the downward trend during the most recent quarter.

Source: Q3 2019 Earnings Slides

However, this downward pressure should come as no surprise, as management previously lowered their full-year net interest margin guidance during the Q2 2019 conference call. At the end of the day, the interest rate environment is definitely a headwind (a short-term headwind, if you ask me), but that is not a reason to sell your BAC shares.

This bank has not only been able to report strong operating results through what has been viewed as a "challenging" environment for the financials, but it also has great long-term business prospects.

Valuation

Based on the bank's own historical metrics, BAC shares are attractively valued at today's price.

Source: YCharts

BofA's stock is trading at the lower end of the P/E ratio range. Moreover, the bank is trading at a discount when compared to its peers based on two key metrics.

Source: YCharts

Citigroup (C) is definitely the outlier, and for good reason. In my mind, BofA should continue to close the valuation gap that it has with JPMorgan (JPM). JPMorgan without a doubt deserves to trade at a premium, but I believe that Mr. Brian Moynihan, CEO, and team have given the market legitimate reasons to value BofA more in line with this best-of-breed bank.

Additionally, let's not forget that BofA has significant dividend growth prospects. The bank's yield is slightly below 2%, which is the lowest dividend yield in its peer group.

Source: YCharts

But, BofA has plenty of wiggle room to increase its payout in the years ahead.

Source: YCharts

Simply put, BofA's stock is attractively valued, and the bank has significant dividend growth prospects. What's not to like?

Risks

Regulatory concerns always need to be factored in when evaluating large financial institutions, and this includes Bank of America. I believe that the regulatory environment is actually improving, but this could change in short order.

The Federal Reserve and rates are a concern right now, but investors need to also consider the macro environment. A deteriorating economy would eventually negatively impact the banking sector. Currently, there are some headwinds, but, in my opinion, a recession is not in the cards in the near future.

Bottom Line

BofA has a great story to tell, and the bank's Q3 2019 results support the bull case. The bank's operating environment may not be ideal, but Mr. Moynihan and team have BofA well-positioned for 2020 and beyond. Let's also not forget that BofA is in a great position from a capital standpoint to weather any near-term storms.

I believe that BofA's stock will be a market-beater over the next 18-24 months, so investors with a time horizon longer than the next few quarters should treat any significant pullbacks, especially if they are caused by broader market concerns, as long-term buying opportunities.

Author's Note: Bank of America is my largest holding in the R.I.P. Portfolio, and I have no plans to reduce my position in the near future.

Disclosure: I am/we are long BAC, C. 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.