Shares of Bank of America (NYSE: BAC) jumped Tuesday after the bank reported mixed second-quarter results, but indicated that it expects its net interest income to start growing again soon. Net interest income is the difference between the interest a bank earns from its loans and the interest it pays out on its deposits, and is an important metric for banks.
Mixed results
When Bank of America delivered that report before the opening bell Tuesday, the headline trends were strong investment banking and wealth management growth, but declining net interest income.
Overall, its profits fell by 7% to $6.9 billion, or $0.83 per share, compared to $7.4 billion, or $0.88 per share, in the prior-year period. Revenue edged up 1% to $25.4 billion.
Its global markets segment led the way, with revenue climbing 12% to $5.5 billion, powered by trading revenue and investment banking fees. Trading revenue jumped 9% to $4.7 billion, with equities revenue surging 20% to $1.9 billion. Investment banking fees soared by 29%.
The global wealth and investment management unit was also strong, with revenue increasing 6% to $5.6 billion, powered by a 14% increase in asset management fees. Client balances climbed 10% year over year to more than $4 trillion, helped by a strong stock market. The company also added more than 6,000 Merrill and private bank clients in the quarter.
Net interest income, however, fell by 3% to $13.9 billion on a fully taxable-equivalent basis (FTE) as higher deposit costs outpaced higher asset yields and loan growth. Its net interest yield fell 13 basis points to 1.93%; excluding its global market segment, net interest yield decreased 24 basis points to 2.41%.
However, management is projecting that its FTE net interest income will rise to $14.5 billion in the fourth quarter. This forecast includes the expectation that the Fed will cut the benchmark federal funds rate by 25 basis points three times before year's end, causing a $225 million negative impact for the bank. It is looking for more potential net interest income upside in 2025 helped by fixed-rate-asset repricing on assets such as auto loans, cash flow hedge benefits, and loans and deposit growth.
Looking at credit quality, Bank of America's net charge-off ratio was 0.59%, up modestly from 0.58% in Q1. Provision for credit losses increased by $189 million quarter over quarter to $1.51 billion. Its book value grew 7% to $34.39 per share, while its tangible book value per share rose 9% to $25.37.
While it was a mixed quarter, the bank displayed strong revenue growth across its trading, investment banking, and wealth management businesses. A rising stock market certainly helped in these areas. And while its net interest income fell in the quarter, the bank forecast that it would begin to grow in Q3 and would likely continue to through 2025. As this is its largest source of income, that should prove a nice growth driver.
Image source: Getty Images
Valuation
Bank of America now trades at a forward price-to-earnings ratio of under 14 -- above its long-term average of around 10.6. Meanwhile, its price-to-tangible-book-value ratio is less than 1.8, and its price-to-book-value is about 1.3 -- around the average levels where the bank has historically traded.
BAC PE Ratio (Forward) data by YCharts.
Given its expected rebound in net interest income, I would anticipate that Bank of America will start seeing improvement in both its earnings and book value. So while the stock is not in the bargain bin, it should have moderate upside over the next year, and is a solid option to consider for the longer term as well.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy .
Most Popular
Comments / 0