Bank of America
Bank of America reported a solid set of results for the 4th quarter of 2021, beating earnings per share estimates by $0.06 to $0.82. The company topped analysts’ expectations due a 10% boost in revenue, driven by strong deposit growth.
Brian Moynihan, the long-standing group CEO said that the “driver of rate increases, has not come through yet’’, referring to the Federal Reserve’s expected 3-4 increases in interest rates in 2022. This should prove to be a boost for growth in Net Interest Income (NII), leading to a positive increase in bottom-line profits, offsetting the increase in operating expenses in Q4. Growth in digital transformation is also expected to drive down operating expenses.
Provisions for credit losses improved by $542m, despite average loan balances being up by $10bn. This was driven by good asset quality, and a net reserve release of $851m being written back into the income statement having a positive impact on the financial results.
Warren Buffet and Charlie Munger have long-favoured Bank of America over the other larger players in the market, with Berkshire Hathaway holding 14.6% of Bank of America. It is Berkshire’s second biggest holding after Apple.
Bank of America’s target market is focused around the consumer segment, which is reflects buoyant turnaround prospects with around 70% of deposit accounts paying investors low returns.
This has resulted in a low cost of capital, which should be beneficial with a rise of say 1% in lending rates. This should boost the bank’s net interest income and expand the net interest margin.
Strong share repurchases for the current year of $25.1bn, and dividends paid of$6bn, represent a positive return of capital to shareholders. Shareholders can expect a quarterly dividend of $0.21 for the current quarter.
The outlook for 2022 appears to be positive, with the share price up 4% since the release of the results, whilst share prices of its peers have declined following disappointing results from them.
US bank shares, a defensive investment, with the sector on a PE of around 10-14x, compares favourably against the S&P on 22x earnings. With tailwinds of increasing interest rates on the horizon, BAC fits into the investment category of value shares. I have been buying Bank of America shares alongside JP Morgan Chase for portfolios I manage. Bank of America is a global player, encompassing, Investment Banking, Wealth Management, Corporate Banking, and Retail Banking services.