Bank of America turns bullish as Q3 results top estimates

Despite the low interest rate environment, cost cutting measures enabled the Bank of America Corp (NYSE: BAC) to report strong and impressive fiscal 2016 third-quarter results.

The second largest US bank in the US reported third-quarter 2016 net income of $4.955 billion, or $0.41 per share, on revenue of $21.635 billion, compared with net income of $4.619 billion, or $0.38 per share, on revenue of $20.992 billion in the similar quarter of 2015. The analysts had expected earnings of $0.34 per share on revenue of $20.965 billion. The BoA closed Monday’s trading session at $16.50.

The North-Carolina based bank reported a 3% y-o-y increase in the net interest income to $10.2 billion. Similarly, the noninterest income also grew 3% y-o-y to $11.4 billion.

Bank of America

Net charge-offs declined to $888 million in the third-quarter, from $932 million in the prior year’s similar quarter.

The loan balance increased 3% to $905 billion, while the deposit balance increased 6% to $1.23 trillion. Client balances increased to $2.5 trillion in the Global Wealth and Investment Management segment. At the end of the third-quarter, fully phased-in Common Equity Tier 1 ratio stood at 10.9%, up from 10.5% in the second-quarter of 2016. The efficiency ratio of the bank improved to 55% from 59%.

The highlight of the third-quarter results is the sales and trading revenue, which increased $442 million or 14% to $3.6 billion. The bank was also a part of all the top 10 debt underwriting deals in the third-quarter.

The average return on assets was 0.90%. The main reason for the return to be below 1% is the current historically low interest rates in the US. A rough calculation indicates that a 25 basis points increase in the interest rates (short-term and long-term) would boost the Bank of America’s profit by as much as $1 billion per annum. With the US Fed believed to be gearing up for a rate hike in December, the investors would certainly remain bullish about the future growth prospects of the bank. Furthermore, the Bank of America’s stock trades at about 30% discount to its book value. So, fundamentally, we expect the stock to remain bullish in the current quarter.

The stock remains in an uptrend with the formation of higher lows. The volatility is at its lowest, thereby indicating price consolidation at the current levels. The positive MACD value shows that the uptrend is intact. On the upside, the major resistance for the stock is at 18.

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