Bank of America Losses Are Manageable
We slightly lowered our fair value estimate for this wide-moat firm after it reported weaker first-quarter earnings.
Wide-moat-rated Bank of America (BAC) reported weaker first-quarter earnings, which was expected given the impact of the COVID-19 pandemic on the global economy. While earnings were weaker, we thought they were good, given the current environment. Preprovision income was down just 5% year over year as rates weighed on net interest income, fees were roughly flat, and expenses were up a modest 2%.
Credit provisioning was the big wild card, and while it was expected that reserves would increase, it would have been impossible to predict the exact amount of reserves the bank was going to book in preparation for the upcoming downturn. This was the main unknown going into earnings. The bank ended up booking roughly $5 billion in provisioning during the quarter. For context, Bank of America recorded less than $4 billion in provisions for all of 2019.
Guidance from management was minimal, with some color given around net interest income. This is understandable on some level, given the high degree of uncertainty caused by COVID-19. Our big takeaway is that losses are, at this point, manageable for Bank of America.
The bank was still solidly profitable during the quarter, with earnings per share of $0.40, which was more than enough to cover the quarterly dividend of $0.18. Tangible book value still grew during the quarter. Losses will have to get materially worse before capital becomes a serious issue.
After updating our model for the latest results, we predict another large reserve build in the second quarter, after which losses begin to level off. We have also incorporated the latest rate cuts and expectations for lower fee income, leading us to a fair value estimate for Bank of America of $30 per share, down from our previous estimate of $32.
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Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.