The 1 Reason You're Wrong to Hate Bank of America
Oct 19th 2013 7:00AM
Updated Oct 19th 2013 7:02AM
While Bank of America had a ho-hum quarter that left many on Wall Street shrugging their shoulders, there was one key thing that could transform your opinion about the investing prospects of this giant bank.
Strong consumer results
Somewhat troublingly, Bank of America's consumer business' net income took a turn for the worse in the second quarter as its net income fell by roughly 4% when compared to the first quarter. However, it saw an incredible rebound in the third quarter as its consumer and business banking segment's net income skyrocketed to the highest level since the third quarter of 2011:
In total over the last year, the consumer unit's profits rose by more than 30%. Compare that to Citigroup , whose consumer business income fell by 22%, thanks in large part to lower revenue.
What was most encouraging about this gain was the fact that it resulted from all four of the ways banks can earn money for their shareholders. It watched both sources of revenue net interest income (money earned on loans) and non-interest income (fees, service charges, and other associated things) rise, while its provision for credit losses (what it expects to lose on loans) and expenses each fell:
At times, different business segments can see strong earnings in large part because of one of those things going right in a quarter, which is often the result of a one-time adjustment or gain. Yet Bank of America's consumer and business banking segment managed to hit on all four this quarter, which was a true win.
Yet not only did it deliver higher profit margins and returns, but it was also able to generate those returns more effectively to shareholders. This is best seen in its efficiency ratio -- which measures the cost required to generate each dollar of revenue -- and the consumer business has also seen steady improvement in that area as well.
After five straight quarters hovering around 56%, it dropped all the way to 53% in the third. Compare that with the Wells Fargo community banking division, whose efficiency ratio rose from 56.6% to 57.7%, as shown in the chart below:
As a result of all of this, Bank of America's largest segment was able to improve its return on average capital dramatically, from 19% to 24%.
As a final point of comparison, JPMorgan Chase's consumer and business banking return on equity fell from 34% to 27%. It is important to note that banks all measure business returns differently -- so just because JPMorgan's is higher doesn't mean it's necessarily better -- but it is important to see that its profitability declined while Bank of America's went up.
While Bank of America has faced many uphill battles in recent years, it has seemingly turned the corner on its most vital business segment -- and the real benefactors could be not only its customers, but its investors as well.
Beyond the third quarter
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The article The 1 Reason You're Wrong to Hate Bank of America originally appeared on Fool.com.Fool contributor Patrick Morris owns shares of Bank of America. The Motley Fool recommends and owns shares of Bank of America and Wells Fargo. It owns shares of Citigroup and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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