Last week, Warren Buffett’s favorite bank, Bank of America (NYSE: BAC), reported its earnings in the third quarter. Even in times tried, the results showed why the notorious Buffett loves him so much.
Despite the pandemic, Bank of America was actually profitable quarterly this year, despite large loan reserves, conveniently covering its dividends. In addition, CEO Brian Moynihan gave investors even more reason for optimism, saying that the bank, apparently, passed the worst consequences of the pandemic not in one but in several aspects.
Net interest income
For example, Bank of America is very sensitive to interest rates, perhaps even more so than other similar banks. During the pandemic, banks had to face double wind lesions associated with net interest income (NII), which is the difference between the interest earned on loans and the interest paid to depositors.
First, during the pandemic, consumers became conservative, repaid loans and took fewer loans in general, while withdrawing more cash deposits. Second, interest rates fell, which means that new loans were provided at lower interest rates than those repaid. Mortgage borrowers have benefited from early repayment of housing loans and refinancing at lower rates.
The combination led to a decline in Bank of America’s NII from $ 12.27 billion in the first quarter to $ 10.98 billion in the second quarter and $ 10.24 billion in the third quarter.
However, management now believes that the decline in R&D is lagging behind the company for four main reasons. First, with regard to commercial and industrial (C&I) revolving loans, management sees that companies are slowly returning to using C&I revolvers as the economy recovers. Second, as with commercial lines, the Bank of America is seeing a resumption of credit card activity, which should lead to an increase in credit card balances, especially as we enter the holiday shopping season. Third, the long end of the yield curve has “stabilized” or stopped declining, and management believes that mortgage buyers may be “tired of refinancing” after a huge level of refinancing during the summer. Finally, Bank of America feels good when it invests more in mortgage-backed securities, compared to storing more cash, which was done in the spring and summer.
Payment activity has actually turned positive from year to year
Moynihan also noted that although GDP recovered to 90% plus last year’s third quarter, Bank of America customers have already recouped more spending in September 2020 than in September 2019, and that October customer spending was about 10% higher level of 2019. This is despite the erasure of payments being erased when payments expired in the last quarter.
In addition to being music for Buffett’s ears, Bank of America generated just $ 417 million in additional loan reserves last quarter, up from a whopping $ 3.6 billion in the first quarter and $ 4.0 billion in the second quarter, indicating the fact that the bank is now almost completely reserved for a potential worst-case scenario as a result of the COVID-19 pandemic.
And incredibly, really clean fees rejected from the second quarter. If the surprises come as a surprise that they are less stringent than expected, Bank of America may see a release of its reserves in the future. And yet on this front, cases are very uncertain. Moynihan said during a conference call with analysts, “we expect reserves to be built behind us, which means profit and profit [profit and loss] The impact of these losses should already be on our financial accounts. ”
Costs of COVID-19
Management also expects the past to be the worst of its increased coronavirus costs. They not only provide security measures, but also increase the cost of processing unemployment applications, as well as the cost of processing Wage Protection Program (PPP) loans. Both of these expenses have some income to offset them, but total expenses resulted in non-interest expenses of about $ 1 billion last quarter.
However, management expects total non-interest expenses to fall from $ 14.4 billion. US last quarter to 13.7 billion dollars. US next quarter as the company moves to a corner on coronavirus.
Cheap low risk bank
Although the results of the Bank of America showed a decrease in income by 9% compared to the same quarter last year, it was not as bad as some counterparts of the bank. This is particularly impressive as it depends mainly on lending and does not have as high a level of sales and trade or investment banking as some other banks (although it does have some).
With a great balance sheet, a low-risk credit book, profits still cover dividends, and Moynihan says the worst is over for the bank on many fronts, Bank of America looks perhaps the safest value in the banking sector, just 0.9 times book value and 12 times more than expected profit.