Fitch: Bank of America's Earnings Highlight Expense Management Efforts
The reported net income of \\$4.51 billion was down from \\$5.32 billion in the sequential quarter, but up from a loss in the year ago quarter which was marred by settlement charges with the Department of Justice (DOJ). These results equated to a 0.84% return on ending assets (ROA) and a 7.05% return on ending total equity (ROE) in 3Q15.
Fitch calculated pre-tax profits, which exclude DVA/CVA adjustments and various other gains/losses, amounted to \\$5.3 billion or a 0.98% adjusted pre-tax return on ending assets. While this result is below the linked quarter's Fitch calculated ROA of 1.35%, it is better than the results posted in the first quarter of 2015 (0.88% ROA) and the fourth quarter of 2014 (0.91% ROA). As noted, the prior year's quarter included a loss due to a significant settlement.
Given a somewhat challenging revenue environment, BAC's earnings performance benefited from management's continued efforts to trim down expenses in both core and legacy operations.
BAC's total revenue was down 6.49% from the linked quarter, and 2.48% from the year-ago quarter. It is noteworthy that the revenue decline was cushioned by approximately \\$400 million of gains on consumer real estate sold as well as \\$385 million of gains on debt securities sold partially offset by a charge of \\$305 million related to PPI claims in the United Kingdom.
Reported net interest income was down from the linked quarter and essentially flat from the year-ago quarter, as the reported net interest yield remained low amid the challenging interest rate environment.
Non-interest income was more mixed, but down from the linked quarter and up modestly from the year-ago quarter. In particular revenue in the Global Wealth & Investment Management segment was down as was revenue in the Global Markets segment for both periods.
However, despite the challenging revenue environment BAC continued to streamline its operations with good expense management. Expenses slightly declined relative to the linked quarter and substantially from the year-ago quarter which included significant litigation and settlement costs.
Much of this good expense management was a result of continued expense reduction in the Legacy Assets and Services segment as well as continued efforts to optimize the cost structure in the company's core businesses.
BAC's asset quality metrics continue to be good. Provision expense ticked up due to some loan growth in the Global Banking Segment as well as some credit migration in certain Oil & Gas related loans. However, in Fitch's opinion, net charge offs (NCOs) remain low and near a cyclical low. As such, provision was less than NCO's by \\$126 million, which also helped to support the company's earnings.
In Fitch's view, BAC's liquidity position remains sound with total deposits of \\$1.2 trillion and a Time to Required Funding of 42 months, up from 40 months in the linked quarter and 38 months in the year-ago quarter.
BAC's Basel III fully phased-in Common Equity Tier 1 (CET1) ratio improved under both the standardized and advanced approaches. Under the standardized approach BAC's fully phased-in CET1 ratio was 10.8% and under the pro forma advanced approach was 9.7%. Given that this pro forma advanced approach ratio is the lower of the two, it will beBAC's binding constraint.
While Fitch notes that this CET1 ratio is below the average of some peer institutions, the denominator of the ratio does include a sizeable component of operational risk weighted assets (RWA).
Additionally, BAC is in compliance with the Enhanced Supplementary Leverage Ratio (SLR) at both the bank and parent company.