On April 18, 2017, Bank of America (NYSE:BAC) reported better-than-expected Q1 2017 earnings, but BAC shares actually ended that day in negative territory (down less than 1%). For Q1 2017, BAC not only beat on the bottom line ($0.41 vs $0.35) but the bank’s top line also came in above the consensus estimate ($22.2b vs $21.6b). For comparison purposes, the bank reported adjusted EPS of $0.28 on revenues of $20.7b for the same quarter in the prior year. So, BAC increased earnings by over 40% YoY but the bank’s stock price is only slightly up since the stellar Q1 2017 results were released. What gives?
Some pundits have downplayed BAC’s Q1 2017 top-line and bottom-line beats due to the fact that the bank faced an easy comp (remember, BAC’s Q1 2016 results were less-than-impressive). But I would contend that the most recent quarterly results, coupled with management’s strong commentary, had an extremely positive impact on the bank’s narrative. Therefore, I believe that investors with a long-term perspective should be licking their chops at this opportunity to start (or add to) a position in a bank that has a great story to tell.
From A Cutback Artist To A Responsible Grower
When I first purchased BAC shares in 2010, my investment thesis was largely related to the bank’s ability to squeeze out costs in order to grow earnings, but this story has officially changed (I know, this statement is a little dramatic). After reviewing BAC’s Q1 2017 results and listening to the tone of the conference call, investors should now expect this bank to make a concerted effort to jump back into growth mode. In my opinion, the following quote properly captures the picture that management was trying to paint during the call:
My teammates continue to deliver for customers around the world, and not many companies have the resources we have to help our clients drive the global economy. But with that, we understand responsibility comes with doing this, and we do it in a responsible way. Responsible growth is driving more sustainable returns for you as shareholders also. This quarter, we produced strong revenue growth; we drove cost savings that offset higher revenue related cost; and we managed risk well. – Brian Moynihan, CEO
I highlighted the phrases within the quote that turned out to be the common themes that management communicated to shareholders throughout the conference call. But the biggest takeaway, in my opinion, was the fact that BAC reported “responsible growth” for the quarter – revenue was up ~7% YoY while non-interest expenses stayed flat.
Mr. Moynihan and team mentioned that growing the bank’s revenue base was a top priority; but they also stressed the importance of the bank making the necessary investments now that will pay dividends in future periods, with the best example being digital banking.
The ramp-up of investments made in the digital space and the increase in revenue-related incentives resulted in quarterly expenses coming in flat YoY…