Business

Bank of America: Why I Bought Dip ‘Ahead of the Storm’


On Friday morning, Bank of America (NORTH), along with most other major U.S. banks, kicked off another earnings season with a flurry of releases. Initial reaction was negative as many of these banks appear to be bracing for a tougher economic environment ahead.

I bought Bank of America, even though I cut that position in half. Simple risk management. Good thing.

Let’s dig inside.

For the company’s fourth quarter, which ended December 31, Bank of America posted GAAP EPS of $0.85 on revenue of $24.53 billion. The revenue print was good enough to grow 11.2% year over year, while both earnings and profit results exceeded the consensus view. Net interest income (NII) grew 29% year on year and 6.5% year on year to $14.68 billion, which is a great number.

Only thing is that Wall Street is looking for $14.8 billion. Non-interest income printed at $9.85 billion, easily beating expectations of $9.3 billion. However, this performance still decreased by 7.9% both sequentially and year-over-year.

Provisions for credit losses amounted to $1.09 billion, including a net provision of $403 million. This compares to $898 million including a net reserve increase of $378 million in the third quarter and a net reserve release of $851 million for the fourth quarter of 2021. Non-interest expenses increased by 6 % to $15.5 billion. Average loan and rental balances increased 10% to $1k.

Average deposits fell 5% to $1.9 trillion. The common tier 1 (CET1) equity ratio printed at 11.2%, up from 10.6% a year ago while the average common shareholder return to equity ratio in 11.24% (up from 10.9%) and the average return on equity of common shareholders at 15.79% (up from 15.24%).

Segment performance

Consumer banking boosted revenue to $10,782 billion (+21%), while provision for credit losses increased to $944 million (from $32 million last year) due to a softening macroeconomic outlook. Non-interest expenses increased 8% to $5.1 billion, resulting in net income of $3.577 billion. The net income print is up 15% and is a new quarterly record.

Global asset and investment management boosted revenue of $5.41 billion (slight increase), while provision for credit losses increased to $37 million (from -56 million last year). Non-interest expenses increased 1% to $3.8 billion, resulting in a net income of $1.2 billion. Net income for this business fell 2.1%.

Global Bank boosted revenue to $6,438 billion (+9%), while provision for credit losses increased to $149 million (from $463 million last year) due to a weakening macroeconomic outlook. Total investment banking fees fell 54% to $1.3 billion. Non-interest expenses increased 4% to $2.8 billion, resulting in net income of $2.54 billion. Net income for this business fell 4.8%.

Global market boosted revenue by $3.861 billion (+1%), while credit provision fell to $4 million (from $32 million last year). Sales and transactions generated $3.5 billion in revenue. In sales and trading… fixed income-related revenue rose 37% to $2.2 billion, while Securities-related revenue rose slightly to $1.4 billion. Non-interest expenses increased 10% to $3.2 billion, resulting in a net income of $504. Net income for this business fell 25%.

Managing director

President and CEO Brian Moynihan commented in the press release: “We ended the year with a remarkable result of earnings growth year-over-year in the fourth quarter in an increasingly slow economic environment. The themes for the quarter that have been consistent throughout the year are organic and proportional growth that has helped deliver value to our deposit franchise. That, together with cost management, has helped drive leverage. seven operations for the sixth consecutive quarter.

Our year-to-date earnings of $27.5 billion were among the best ever for the bank, reflecting our long-term focus on customer relationships and strategy. our responsible growth strategy. We believe we are well positioned as we begin 2023 to deliver to our customers, shareholders and the communities we serve.”

My thoughts

Are there many things here that surprise me? No. We know that investment bankers didn’t have a great quarter. We know that net interest income will be huge. We know that fixed income traders outperform equity traders. We also know that banks will have to be more prepared than in recent quarters for possible credit losses.

That said, I think the scale of these terms is scaring Wall Street a bit this morning. Just look at the reasons given for the increased provisions… “fueled by a deteriorating macroeconomic outlook.” That is not highly recommended. Just look at Brian Moynihan’s comment… “a slowing economic environment.” Hmm.

I see net interest income as driving force for 2023. That’s why my only two long positions in this sector are Bank of America and Wells Fargo (WFC) . I also understand that with an economy in recession or near a recession, it will be difficult for banks to grow consumer and business lending, or increase investment banking fees. That’s why I’ve reduced my stake in both of these names.

Do I buy this dip? Banks were well capitalized before the storm. There are parts of the business that can perform well despite or despite an economic downturn. Commerce. Sell ​​fixed-income securities. I don’t think I’m going to bring these positions back to last year’s size, but I think I can add to this morning’s drop.

Readers will find that BAC has bounced back from $29 twice this year. The first that culminated in the February-July sell-off. In August, we saw the BAC stall at the 38.2% perfect Fibonacci retracement level of that sell-off. After bottoming again in October, this time the stock took a pause close to the 50% retracement level of that sell-off. I think we have a range.

The stock has found support at the 21-day EMA (exponential moving average) since retracing that line in late December. This morning I saw the stock struggling to hold that level. If those stocks are held, it really shouldn’t take long to get back to the 20-day and 50-day SMA (simple moving average) in a short time as all three of these lines are converging.

What I would do is add these stocks when the 21-day line fails and traders pivot to relief, or when the stock crosses that 50-day line and all the portfolio managers rush gold increased exposure. I really don’t see the need to add between $33.74 (21-day EMA) and $34.79 (50-day SMA). To do so, in my opinion, would actually expose the buyer to the risk of making this purchase at or near resistance.

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