A solid quarter, or so it would seem.
Bank of America (BAC) released the firm's second quarter financial results on Tuesday morning. For the three month period ended June 30th, Bank of America posted a GAAP EPS of $0.88 on revenue of $25.197B. While these results beat Wall Street's expectations for both the top and bottom lines, the revenue print was good enough for year over year growth of 2.9%. The earnings print for this Action Alerts PLUS holding compares to $0.73 for the year ago comparison as net income increased 19% year over year to $7.408B.
Net interest income popped 14% (up $1.7B) to $14.2B or $14.3B FTE. (FTE: fully taxable-equivalent basis), driven primarily by higher interest rates and loan growth. Non-interest income increased 8% (up $795M) to $11B as higher sales and trading revenue more than offset a reduction in service charges and brokerage fees.
Bank of America's provision for credit losses increased $602M to $1.1B. This included a net reserved build of $256M versus a release of $48M for the year ago period. Net charge-offs of $689M increased year over year, but remained below pre-pandemic levels.
Looking deeper into the nitty gritty, non-interest expense increased 5%, average loan and lease balances increased 3%, as average deposit balances decreased 7% year over year and 1% sequentially. As for the underlying data, the CET1 ratio stands at 11.6%, its efficiency ratio stands at 64%.
Book value per common share ended the quarter at $32.05 (+7%), while tangible book value per common share ended the period at $23.23 (+10%). Return on average common shareholders' equity ratio printed at 11.2%, as return on average tangible common shareholders' equity ratio hit 15.5%.
Segment Performance
- Consumer Banking generated revenue of $10.524B (+15%), thanks to improved net interest income. Net income dropped 1% to $2.853B. Pretax, pre-provision income increased 21% to $5.1B. Average deposits decreased 7% to $1.006B. Average loans and leases increased 6% to $306.7M. Total credit card outstanding balances increased 16.5% to $94.4M as risk adjusted margin dropped to 7.8% from 9.9%. Provision for credit losses of $1.3B increased by $917M.
- Growth Wealth and Investment Management generated revenue of $5.242B (-4%) as transactional volumes drove management and brokerage fees lower. Net income decreased 15% to $978M. Client balances increased 8% to $3.6T. Average deposits decreased 19% to $295M, as average loans and leases remained flat at $219M.
- Global Banking generated revenue of $6.462BB (+29%), thanks again to improved net interest income. Net income increased 76% to $2.653B. Pretax, pre-provision income increased 65% to $3.6B. Provisions for credit losses of $9M decreased $148M. Average deposits decreased 2% to $497.5B. Average loans and leases increased 2% to $383.1B.
- Global Markets generated revenue of $4.871B (+8%). Net income increased 9% to $1.106B. Sales and trading revenue increased 3% to $4.3B. FICC (fixed income, currencies and commodities) revenue increased 7% to $2.7B. Equities revenue decreased 2% to $1.6B.
Hmmm....
I was wrapping up this piece when I noticed Andrew Bary's piece at the Barron's website. Bary pointed to the growth of nearly $7B in losses on the firm's portfolio of debt securities. So, I moseyed over to the supplemental information provided by the bank with all of the other materials available at the firm's website. If you go there, it's on page nine.
Under Held-to-maturity securities, after aggregating Agency Mortgage-Backed Securities, US Treasury and Government Agencies, and "other" securities, total held-to-maturity debt securities show a gross unrealized loss of $105.798B, which has grown from $99.076B on March 31st. Growth here was expected. This is worse than expected. These securities show an amortized cost of $614.149B, and on June 30th, fair value of $508.351B.
Now, if these securities that are mostly agency mortgage backed, are indeed held to maturity and made good on, then at the end of the day, there is no harm no foul. Then again, if there is no risk, why is fair value priced at a 17% discount to the amortized cost?
As Bary points out at Barron's -- I am thinking about my long position in BAC and not trying to steal his thunder -- these mark to market losses do not have to be reflected in the bank's capital ratios, but they would account for a chunk of the bank's tangible common shareholders' equity of $184.755B (on page 19 of the press release).
Things that make you go hmmm.
My Thoughts
That last segment really caught my attention. I have been very happy with my long position in Wells Fargo (WFC) as I do believe that CEO Charles Scharf is turning that bank around and that bank covers the traditional banking space as well as anyone.
I had been less than thrilled with my long position in Bank of America and had been mildly perturbed of late that I had not been long JPMorgan Chase (JPM) as I readily admit that JPM is "best in class" among large US banks.
Traditional banking had been where I wanted my exposure to this space for the first half of the year. As the more boutique-ish side of the business possibly gathers steam going into the second half, I am thinking of moving out of BAC now that this morning's 4% pop has put me back in the green, and trying to put the cash created by that liquidated position into JPM, intelligently.
I don't want to buy JPM on day nine after an eight day winning streak. This will require a little finesse, so it's not exactly a pairs trade. I could go out to an expiration date of October 20th and get paid a rough $1.25 to take on equity risk (sell puts) at the $135 level (basis: $133.75).
Regardless of how I build up long exposure to JPM, this is my chance to get my money back in BAC, and that's what I am going to do.
(BAC is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells this stock? Learn more now.)
