Decent Fourth-Quarter Results for Bank of America
We are raising our fair value estimate for the wide-moat firm.
Wide-moat Bank of America (BAC) reported decent fourth-quarter earnings, with EPS of $0.59 per share just above the FactSet consensus estimate of $0.55. This equates to a return on tangible common equity of nearly 12% for the quarter. The biggest swing factor, and one we have highlighted in the past, was the bank's provisioning for credit losses. In the current quarter, Bank of America was able to release roughly $800 million in reserves compared with net charge-offs of roughly $900 million, resulting in provisioning of only $53 million during the quarter. Compared with provisioning of roughly $1.4 billion in the third quarter, this was a roughly $0.12 swing in EPS, assuming a 20% tax rate. The possibility of reserve releases occurring had been talked about before the beginning of the fourth quarter, but it is nice to see it actually occurring, as it signals that the banks appear to be very well reserved, which has been our thesis all along. While positive provisioning developments aren't sustainable over the long run, it is worth pointing out that Bank of America, in what was arguably the toughest year for banks since the 2008-09 financial crisis, reported a return on tangible common equity of 9.5% for the full year, still meeting our estimate of the bank's cost of equity. After incorporating the latest results into our long-term projections for Bank of America, we are raising our fair value estimate to $30 per share from $28.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Eric Compton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.