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

On Friday morning, Bank of America (BAC) , together with many of the other large US banks, kicked off one other earnings season in a flurry of releases. The early response is negative as a lot of these banks seem like preparing for a tougher economic environment ahead.

I got here in long Bank of America, though I had cut that position in half coming in. Easy risk management. Good thing.

Let’s dig in.

For the firm’s fourth quarter, which ended December thirty first, Bank of America posted GAAP EPS of $0.85 on revenue of $24.53B. The revenue print was adequate for yr over yr growth of 11.2%, while each the highest and bottom line results exceeded consensus view. Net interest income (NII) increased 29% annually and 6.5% sequentially to $14.68B which is great.

Only thing is that Wall Street was on the lookout for $14.8B. Noninterest income printed at $9.85B, which easily beat expectations for $9.3B. Nonetheless, this performance was still down 7.9% each sequentially and from the yr ago period.

Provision for credit losses got here to $1.09B, including a net reserve construct of $403M. This compares to $898M including a net reserve construct of $378M for the third quarter and a net reserve release of $851M for Q4 2021. Noninterest expense increased 6% to $15.5B. Average loan and lease balances increased 10% to $1T.

Average deposits were down 5% to $1.9T. Common equity tier 1 (CET1) ratio printed at 11.2%, up from 10.6% a yr ago while return on average common shareholders’ equity ratio prints at 11.24% (up from 10.9%) and return on average tangible common shareholders’ equity prints at 15.79% (up from 15.24%).

Segment Performance

Consumer Banking drove revenue of $10.782B (+21%), while provision for credit losses increased to $944M (from $32M last yr) driven by a dampened macroeconomic outlook. Noninterest expense increased 8% to $5.1B, leading to net income of $3.577B. The web income print was up 15% and is a brand new quarterly record.

Global Wealth and Investment Management drove revenue of $5.41B (up small), while provision for credit losses increased to $37M (from $-56M last yr). Noninterest expense increased 1% to $3.8B, leading to net income of $1.2B. Net income for this business was down 2.1%.

Global Banking drove revenue of $6.438B (+9%), while provision for credit losses increased to $149M (from $-463M last yr) driven by a dampened macroeconomic outlook. Total investment banking fees decreased 54% to $1.3B. Noninterest expense increased 4% to $2.8B, leading to net income of $2.54B. Net income for this business was down 4.8%.

Global Markets drove revenue of $3.861B (+1%), while provision for credit losses decreased to $4M (from $32M last yr). Sales and trading generated $3.5B in revenue. Inside sales and trading… fixed income related revenue increased 37% to $2.2B, while Equities related revenue increased small to $1.4B. Noninterest expense increased 10% to $3.2B, leading to net income of $504. Net income for this business was down 25%.

The CEO

Chair and CEO Brian Moynihan commented within the press release: “We ended the yr on a powerful note growing earnings yr over yr within the 4th quarter in an increasingly slowing economic environment. The themes within the quarter have been consistent all yr as organic growth and rates helped deliver the worth of our deposit franchise. That coupled with expense management helped drive operating leverage for a sixth consecutive quarter.

Our earnings of $27.5B for the yr represent among the finest years ever for the bank, reflecting our long-term concentrate on client-relationships and our responsible growth strategy. We imagine we’re well positioned as we start 2023 to deliver for our clients, shareholders and the communities we serve.”

My Thoughts

Is there much here that surprises me? No. We knew that investment bankers didn’t have a fantastic quarter. We knew that net interest income can be huge. We knew that fixed income traders would outperform equity traders. We also knew that the banks would have to organize more so than in recent quarters for potential credit losses.

That said, I feel that the dimensions of those provisions is scaring Wall Street a little bit this morning. Just take a look at the explanations given where there have been increased provisions made… “driven by a dampened macroeconomic outlook.” That is not very encouraging. Just take a look at Brian Moynihan’s own comments… “an increasingly slowing economic environment.” Hmmm.

I get that net interest income will likely be a driver for 2023. That is why my only two longs on this space are Bank of America and Wells Fargo (WFC) . I also understand that with the economy either in recession or near it, that it would be very difficult for the banks to grow consumer and business loans, or increase investment banking fees. That is why I even have reduced my holdings in each of those names.

Do I purchase this dip? The banks are well capitalized ahead of the storm. There are parts of the business that would do well despite or despite a recession. Trading. Sales of fixed income securities. I don’t think that I bring these positions back as much as their yr ago sizes, but I do think that I can add on this morning’s dip.

Readers will see that BAC has rebounded off of the $29 level twice this yr. The primary culminated the February through July selloff. In August, we saw BAC stall at an ideal 38.2% Fibonacci retracement of that selloff. After bottoming again in October, the shares were halted this time at near a 50% retracement of that selloff. I feel we’ve got a variety.

The shares have found support on the 21 day EMA (exponential moving average) since retaking that line in late December. This morning, I see the shares struggling to carry that level. Should those shares hold, it really is not going to take much to regain the 20 day and 50 day SMAs (easy moving average) briefly order as all three lines are bunched.

What I’m going to do is either add these shares because the 21 day line fails and the swing traders bail out, or because the shares take that fifty day line and the entire portfolio managers rush to extend exposure. I actually don’t see the necessity to add in between $33.74 (21 day EMA) and $34.79 (50 day SMA). To accomplish that, really would for my part, put the client susceptible to having made this purchase at or near resistance.

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