On 18 April 2023, Bank of America (NYSE:BAC) reported Q1 2023 revenue and earnings comfortably ahead of expectations. Yet the stock price finished almost unchanged on the day. Why? And what now for investors?
Let’s look at the key numbers before we consider the apathy toward them.
Revenue and earnings soar
CEO Brian Moynihan told the audience on the earnings call that, “Our company produced one of its highest core EPS, earnings numbers in a challenged operating environment in the first quarter. Simply put, we navigated that environment well. The preparedness and strength of Bank of America and the trust of our clients reflects a decade-long responsible growth model and relationship nature of our franchise. During quarter one, importantly, organic growth engine continued to perform.”
Moynihan described how every business segment had performed well, leading to revenue growth of 13% compared to Q1 2022 and delivering EPS up more than 17%:
- Revenue of $26.3 billion ($23.2 billion in Q1 2022)
- Net income of $8.2 billion (7.1 billion in Q1 2022)
- EPS of $0.94 ($0.80 in Q1 2022)
The highs… and the lows
Did every business sector perform well? Let’s look at the numbers here, with a little commentary on them.
In Consumer Banking, revenue increased by around 22% from the comparable quarter a year earlier, to $10.7 billion. However, net income was up by only 4% to $3.1 billion from $42.98 billion a year earlier. And compared to Q4 2022, net income fell by $469 billion, or 13%.
The revenue growth was driven by higher net interest income (NII) because of higher interest rates and loan balances. However, this has come at a cost – BAC increased its provision for credit losses to £1.1 billion vs a benefit of $52 million this time last year.
The story was different in BAC’s Global Wealth and Investment Management business, where revenue and net income both declined from a year earlier – to $5.3 billion ($5.48 billion in Q1 2022) and $917 million ($1.13 billion in Q1 2022) respectively.
Though higher NII impacted these numbers positively, it wasn’t enough to offset the impact of lower equity and fixed income market valuations on asset management fees.
The bank posted strong gains in revenue and net income in Global Banking. Revenues here were boosted by higher NII, though this was partially offset by lower investment banking fees, lower treasury service charges due to higher earnings credit rates, and lower revenue from environmental, social and governance (ESG) investment activities.
Nevertheless, revenues came in at $6.2 billion: an extremely healthy increase from the $5.2 billion a year earlier (though, again, down on the $6.4 billion in Q4 2022). A boost from a reduction in provision for credit losses – from $165 million in Q1 2022 to a benefit of $237 million in Q1 2023 ─ helped pump up net income to $2.55 billion from $1.72 billion.
In Global Markets, revenues and net income both increased by 6% when compared to a year earlier. Higher sales and trading revenue combined with a drag caused by lower investment banking fees to push revenue to $5.6 billion. Despite an 8% increase in non-interest expenses (primarily because of investment in the business, including technology and people), net income increased by $93 million to $1.7 billion.
Bank deposits down, despite customer numbers up
While the loan book increased, deposits at the bank decreased – and this was despite an increase in customer numbers.
In Consumer Banking:
- Average deposits fell by 3%
- Average loans and leases increased by 7%
- Consumer investment assets fell by 1%
- Consumer investment accounts grew by 9% to a record 3.6 million customers
- Digital bank users grew by 6% to a record 45 million
In Global Wealth and Investment Management:
- Client balances fell by 5% to £3.5 trillion
- Average loans and leases grew by 5%
- There was a record of 13,600 new net households registered
In Global Banking:
- Average deposits of $493 billion decreased by 9%
- Average loans and leases of $381 billion increased by 6%
BAC believes a recession is looming, and is trimming its headcount
On the earnings call, Brian Moynihan reiterated the bank’s view that the United States will enter a recession this year. BAC predicts a ‘mild recession’ stretching across the second to fourth quarters of 2023 before the economy returns to positive in 2024.
BAC’s Q1 expenses of $16.2 billion were mostly driven by what CFO Alastair Borthwick called a “seasonal elevation from payroll taxes”.
“We ended the first quarter with a little more than 217,000 people at the company, which was 260 people more than year-end,” Borthwick noted. “During the quarter, we welcomed 3,000 additional people into the company in January; that’s due to outstanding offers that we extended in the fourth quarter.”
BAC have now announced they will reduce this headcount by 4,000 by the end of the current quarter. Consequently, the company should see a benefit to expenses from a reduction in payroll.
Is BAC reliant on higher rates and market-making activity?
And so, we come to the crux of the matter. BAC’s loan book has increased, and higher interest rates have allowed it to cash in on this. And its market makers, especially in the bond markets, had their best year for a decade. Does this combination point to the fragility in its short-term earning potential?
The answer must be yes. If we do head into a recession, interest rates may contract. Already, we’ve seen delinquencies and charge-offs begin to increase.
Alastair Borthwick said, “The consumer’s in great shape in terms of credit quality by any historical standards. Employment remains good, wages remain good, and we haven’t seen any cracks in that portfolio yet.” But the jury must be out on this – a recession will lead to higher unemployment and lower wage growth. Which is why the bank is now setting aside provisions for bad loans.
There must be a question mark over the ability to repeat results in market making, too. It’s a volatile risk business.
If BAC management has judged the market correctly, then its reliance on the growth of its loan book and customer numbers could pay off handsomely. However, BAC could now be a play on the economy as much as the quality of BAC’s management.
This said, with the shares trading at a PE of 9.2 and offering a dividend of 2.88% with a payout ratio of only 26%, BAC remains interesting for income investors. Any dip in the share price could present an opportunity for long-term income investors to add to their portfolio.