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.

Bank of America