Analyzing Bank of America’s capital position
As we discussed previously in this series, Bank of America’s (BAC) 4Q15 earnings beat Wall Street (SPY) analyst expectations due to higher loan growth and consistent financial performance. In this part, we will discuss an equally important component of the banking industry: capital position.
Tier I capital is a measure of a bank’s financial strength from a regulator’s point of view. It is the ratio of a bank’s equity capital to its risk-weighted assets. Bank of America’s capital position at the end of 4Q15, as measured by the Tier I capital ratio under Basel III norms, has remained constant at 12.9%. Its common equity Tier 1 capital ratio was 11.6% at the end of the quarter.
Credit quality remains strong
Bank of America’s non-performing loans (or NPLs) in the consumer segment fell by $532 million from 3Q15 to $12.8 billion in 4Q15, driven by consumer real estate NPL sales. In the commercial segment, NPLs were higher at $1.2 billion.
Credit quality was strong during the quarter, as the annualized charge-off rate remained low at 0.5%, complemented by a decline in NPAs (non-performing assets). The charge-off rate included commercial losses of 0.17% and consumer losses of 0.84%. Charge-off rates are defined as the flow of a bank’s net charge-offs (gross charge-offs minus recoveries) during a quarter divided by the average level of its loans.
Investors seeking exposure to US banks could invest in the Financial Select Sector SPDR ETF (XLF) or the Vanguard Financials ETF (VFH). Large banks like Wells Fargo (WFC), JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) are well-represented in their portfolios.