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What Drove Bank of America’s Q3 Profits to Jump 37% YoY?


Oct. 19 2018, Published 7:26 p.m. ET

Q3 earnings surpassed estimates

On October 15, Bank of America (BAC) reported better-than-expected bottom-line results for the third quarter. The bank posted earnings of $0.67, beating the Wall Street estimate of $0.62 and marking ten consecutive quarters of earnings beats.

Bank of America’s earnings rose ~37.0% on a YoY (year-over-year) basis and ~5.0% on a sequential basis. The robust growth in its bottom line was mainly driven by higher rate spreads, reduced expenses, and lower tax rates.

Bank of America (BAC) noted that this substantial boost came from lower effective tax rates, which declined to ~20.0% in the third quarter from 29.0% in the third quarter of 2017. The effective tax rate for the quarter was almost flat compared with the second quarter.

The bank reported third-quarter noninterest expenses of $13.1 billion, 2.0% lower than in the third quarter of 2017 and 1.6% lower than in the second quarter. This trend was primarily due to improved productivity and disciplined expense management.

Bank of America’s third-quarter results marked the 15th consecutive quarter of positive operating leverage. The bank’s third-quarter efficiency ratio of 57.0% was 368 basis points lower than in the third quarter of 2017 and 137 basis points lower than in the second quarter.

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Peer comparisons

Among the major bankers (XLF), JPMorgan Chase (JPM) and Citigroup (C) also beat analysts’ estimates and marked massive YoY increases of ~33.0% and ~22.0%, respectively. Although Wells Fargo’s (WFC) third-quarter earnings fell short of Wall Street estimates, it recorded a 32.0% YoY increase due to higher interest income and lower expenses.

BAC stock dropped on loan growth concerns

Despite reporting strong top-line and bottom-line results, Bank of America (BAC) stock closed ~2.0% lower on October 15, as the bank’s loan growth lagged its peers. During the quarter, the company’s total loan book grew just 0.3% year-over-year to $930.0 billion. However, JPMorgan Chase and Citigroup registered growth of 6.0% and 4.0%, respectively.

The subdued growth in Bank of America’s loan book was due to weakness in mortgage loans and a decline in loans to its market business customers. This almost completely offset the benefit of the lending gains in its Consumer Banking, Wealth Management, and Commercial segments.

In this series, we’ll look at Bank of America’s third-quarter earnings and revenue growth drivers, segment performance, and balance sheet expansion.


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