Bank of America Earnings: Encouraging NII Guidance and Expense Control Should Boost Profitability

Key Morningstar Metrics for Bank of America

• Fair Value Estimate: $38.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Bank of America’s Earnings

Bank of America BAC reported good second-quarter numbers. Earnings per share came in at $0.83, slightly lower than the $0.88 seen in the year-ago quarter. For us, the biggest highlight was the company’s encouraging net interest income outlook for the remaining half of the year. Management expects NII to increase from $13.9 billion in the current quarter to around $14.5 billion by the fourth. The shares have rallied around 5% since the announcement of the results on July 16.

Profitability in the second half should also be boosted by expense control and relatively strong fee income in the bank’s asset management, investment banking, and trading businesses. The second-quarter numbers resulted in a return on tangible equity of 13.6%. We plan to increase our $38 fair value estimate by a mid-single-digit percentage as we fully incorporate these results. The increase can mostly be attributed to the time value of money and slightly higher NII in the near term than we previously anticipated.

The shares had corrected by around 50% in late 2023 from their highs in early 2022, partly due to fears about the bank’s profitability and higher exposure to long-duration securities. Among other things, investors have been penalizing Bank of America for its longer-duration securities exposure when interest rates were rising. Those securities weighed on NII, as such assets were stuck on the books while earning lower yields. We have continuously highlighted that the bank’s balance sheet position will temporarily weigh on earnings, but the long-term earnings capacity of this high-quality franchise is fully intact. The shares have rallied by around 75% from their lows in late 2023.