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Bank of America: Strong Q3 Earnings, Falling Rate Concerns

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  • Bank of America announced stronger-than-expected third-quarter earnings.
  • Credit growth, higher deposits, increased investment banking fees, and share buybacks supported the company’s third-quarter earnings.
  • Falling interest rates are a concern. Lower interest rates could hurt the net interest income growth rate.
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Bank of America’s third-quarter earnings

Bank of America (BAC) had an impressive third-quarter performance. The bank’s revenues and earnings beat analysts’ expectations. Bank of America’s third-quarter revenues, net of interest expenses, stayed relatively flat at $22.96 billion. However, the revenues beat analysts’ expectations of $22.79 billion.

Meanwhile, Bank of America’s EPS of $0.56 beat analysts’ expectations of $0.51 but fell about 15% YoY (year-over-year). However, excluding the impairment charge, the bank’s EPS was $0.75—up 14% YoY.

In comparison, JPMorgan Chase (JPM) and Citigroup (C) posted better-than-expected third-quarter results on Tuesday. JPMorgan Chase’s EPS marked double-digit growth and beat analysts’ expectations by a wide margin. Higher IB revenues and the lower outstanding share count drove the bank’s earnings. Meanwhile, Citigroup’s EPS rose 20% and beat analysts’ consensus estimate due to share repurchases and a substantial decline in the tax rate.

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We think that balance sheet expansion could continue to support banks’ NII (net interest income). However, lower deposit margins amid the Fed’s dovish stance could play spoilsport. JPMorgan Chase lowered its NII outlook twice this year. The bank expects its NII to be lower than $57.5 billion. Earlier, the bank expected its NII to be $57.5 billion in 2019.

The low interest rate environment and more competition could hurt Bank of America’s margins in the coming quarters. Earlier, the bank warned that its net interest income growth rate would slow down considerably due to falling interest rates.

Notably, Bank of America’s NII rose about 1% due to growth in loans and deposits. Average loans and leases increased 6% YoY to $923 billion. Meanwhile, average deposits rose 4%. However, lower long-term interest rates remained a drag. The net interest yield fell by 4 basis points to 2.41%. 

Segmental performance

Bank of America’s revenues in the Consumer Banking segment increased 3% due to higher NII. Growth in loans and deposits drove the segment’s top line. Provisions increased modestly on a YoY basis. However, the efficiency ratio improved by 63 basis points to 45%. Average loans increased 7%, while deposits marked 3% growth.

The revenues in the Global Wealth and Investment Management segment rose 2%. The segment’s deposits and loans increased, which drove the NII higher. Increased asset management fees supported the top-line growth.

The Global Banking segment’s revenues rose 8% due to higher investment banking fees and leasing-related revenues. The investment banking fees increased 27% YoY, which reflected higher M&A and debt underwriting fees. The segment’s efficiency ratio improved to 43%. The Global Markets segment’s revenues stayed flat.

Bank of America stock was trading 2% higher in the pre-market session.

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