BAC’s asset quality remains strong and efficiencies in costs should help self-fund new investments in tech and marketing which should help gain market share

Investment Thesis:

Attractive valuation versus the price target.
Leveraged to the improving economic conditions and activity in the U.S.
Efficiency gains at the expense line exceeds market expectations.
Significant leverage to the yield curve steepening in the U.S.
Cost out program to support earnings over the long-term.
Revenue growth driven by consumer and business.
Credit quality is very strong, with further reserve releases possible.
Capital position is well above requirement level and management’s desired buffer, which opens up capital management initiatives.

Key Risks:

Further decline in net interest margins from low yields and U.S. Fed interest rate cuts.
Intense competition to loan growth.
Subdued economic growth or a shallow/deep recession.
Funding pressures for deposits and wholesale funding.
Political and regulatory changes affecting the banking legislation.
Credit risk with potential default of mortgages, personal and business loans and credit cards.
Efficiency gains disappoint relative to market expectations.

Key Highlights:

2Q22 result summary. Revenue (net of interest expense) increased +6% y/y to$22.7bn, with Net interest income (NII) up +22% y/y to $12.4bn (yield up +25bps to 1.86%), driven by higher interest rates, lower premium amortization and loan growth, and non-interest income down -9% y/y to $10.2bn, driven by lower investment banking fees, mark-to-market losses related to leveraged finance positions and lower service charges due to non-sufficient funds and overdraft policy changes, partially offset by higher sales and trading revenues.
Non-interest expense increased +2% y/y (flat qoq) to $15.3bn and included $425m recognized for certain regulatory matters.
Net income of $6.2bn, declined -32% y/y as pcp benefited by positive tax adjustment from revaluation of U.K. deferred tax assets of $2bn and $2.2bn in credit reserves releases, with Consumer Banking decreasing -5% y/y to $2.9bn, Global Banking decreasing -38% y/y to $1.5bn, Global Markets increasing +12% y/y to $1bn and Global Wealth & Investment Management increasing +16% y/y to $1.2bn.
Average loan and lease balances up +12% y/y to $1.0 trillion led by strong commercial loan growth as well as higher consumer balances and average deposits up +7% y/y to $2.0 trillion.
CET1 declined -100bps y/y (up +10bps qoq) to 10.5%, however, remains well above 2Q minimum requirement of 9.5% and +10bps above expected minimum required on October 1, with management expecting to build some additional buffer on top of that in 3Q.
Shareholder returns of $2.7bn ($1.7bn in dividends and $1bn in repurchases).
NII outlook. Assuming forward curve (as on July 15) materializing (asset sensitivity on a spot basis to a 100bps rate hike would be $5.8bn), modest growth in loans and deposits and deposit betas reflecting disciplined pricing, management expects net interest income in 3Q22 to increase by $900m-1bn qoq, further growing at a faster pace on a sequential basis in 4Q22, which combined with combined with expense discipline should boost the bottom line.
Strong asset quality. Asset quality continued to remain strong with net charge-offs declining -4% y/y to $571m resulting in a net charge-off ratio of 23bps (down -4bps y/y), however, bank took a provision for credit losses of $523m (vs release of $1621m in pcp) amid loan growth and builds for a dampened macroeconomic outlook in the future. Though a slowdown in economy/recession brings risks of worsening credit profile, the BAC’s loan portfolio remains solid and carries less inherent risk compared to prior downturns, with lower concentration in the consumer portfolio (down -22% vs 4Q09), less exposure to unsecured consumer credit (down -48% vs 4Q09) and home equity loans (down -82% vs 4Q09), and 92% of commercial loan book either investment-grade or secured with Fed’s stress test indicating significantly lower credit losses expected in a severe downturn (5.2% vs 6.9% in 2013) and the bank holding much higher liquidity with global liquidity sources having increased 5x over 4Q09.

Company Description:

Bank of America (BAC) is one of the largest banks in the U.S., serving consumers, small and middle-market businesses, and large corporations with a full range of banking, investing, asset management, and other financial and risk management products and services.

(Source: Banyantree)

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