Bank of America (NYSE:BAC) stock was rising on Tuesday after the firm posted its second quarter earnings.
While the bankʻs profits were down year-over-year, they came in better than anticipated.
The second largest bank in the U.S. posted revenue of $25.4 billion in the second quarter, which was slightly more than the $25.2 billion in the same quarter a year ago, but down from $25.8 billion in Q1. However, revenue topped estimates of $25.2 billion.
Net income fell 6.8% year-over-year to $6.9 billion, or 83 cents per share. While down, this was better than median estimates of 80 cents per share.
It was enough to move the share price as Bank of America stock rose 5% in early trading on Tuesday to over $44 per share. Investors are likely encouraged by some promising signs.
Net interest income down, but investment banking up
Like most banks, Bank of America saw lower net interest income in the quarter, as high deposit rates continue to eat into profits. The bank generated $13.7 billion in net interest income, down 3% from the same quarter a year ago despite the fact that loan balances were up 2% in the quarter.
Overall, net income in consumer banking, its largest business line, fell 9% to $2.6 billion. But because of its diversified revenue streams, Bank of America earnings got a lift from other areas, particularly investment banking and its Global Markets businesses.
Investment banking revenue climbed 29% in the quarter to $1.6 billion, placing Bank of America third in the quarter in deals.
Also, the Global Markets arm, which is the institutional trading segment of the business, saw revenue climb 12% to $5.5 billion, while net income grew 27% year-over-year to $1.4 billion.
Further, revenue in the Global Wealth and Investment Management segment rose 6% to $5.6 billion, fueled by higher asset levels and investment management fees.
“The strength and earnings power of our leading Consumer Banking business is complemented by the growth and profitability of our Global Markets, Global Banking, and Wealth Management businesses,” said Bank of America Chairman and CEO Brian Moynihan in the earnings release.
Some promising signs
While the results were mixed, investors saw some promising signs, which drove the share price 5% higher on Tuesday.
First, the provisions for credit losses were up to $1.5 billion from $1.1 billion in Q2 of 2023, but within consumer banking, they were roughly flat at about $1.3 billion. That indicates that the bank believes its credit quality is solid and it doesn’t anticipate an unusual volume of defaults or hardship cases ahead.
However, net charge offs — loans not expected to be repaid — did rise from $869 million a year ago to $1.5 billion in Q2. Further, the amount of loans 90 days or more past due was $1.47 billion, up from $1.18 billion a year ago, but down from $1.53 billion in Q1.
This indicates that credit quality, while improving, remains something to keep an eye on.
Bank of America also improved its efficiency, lowering expenses 5% from the first quarter to $16.3 billion and reducing its efficiency ratio to 64%, from 67% in Q1. The lower the efficiency ratio, the better, as it means the company is spending less to generate profit.
In addition, Bank of America expects to see net interest income rise to $14.5 billion in Q4, up from $13.9 billion this year, with low single-digit loan and deposit growth. This is based on the potential for multiple interest rate cuts through the end of the year.
Should you buy?
Finally, the bank raised its quarterly dividend to 26 cents per share, from 24 cents per share the previous quarter, at a yield of about 2.2%.
Bank of America stock is up about 28% YTD and it is still a solid value with a P/E ratio of 14. While consumer banking has struggled, things should start to improve there when the Fed lowers rates.
Meanwhile, its diversified revenue streams should provide a further boost, particularly investment banking, which should surge as rates go down.
Bank of America has had a nice run and it is now at the top of its 52 week range. While it wonʻt shoot the lights out, it looks like a decent buy at this valuation with some catalysts.
