Effective cost-cutting and lower taxes enabled Bank of America Corporation (NYSE: BAC) to post better than anticipated earnings in the fiscal 2018 second-quarter. Additionally, the bank’s plan to invest in technology, a lower provision for credit losses, and a steep decline in non-performing loans, indicates that the stock is poised for a bullish rally in the days to come. The stock of Bank of America closed at $29.78 on Monday.
The Charlotte, North Carolina-based bank reported 2Q18 revenues of $22.61 billion, a slight decline from $22.83 billion recorded in a similar period last year. Analysts expected revenue of $22.27 billion for the quarter.
During the second quarter of 2018, net income to shareholders increased to $6.5 billion or $0.63 a share, from $4.8 billion or $0.44 a share, in the prior year’s similar period. Analysts had expected earnings of $0.57 per share for the quarter.
The bank slashed costs by 5% to $13.3 billion, beating the $13.5 billion view of Wall Street analysts surveyed by Thomson Reuters. Reflecting the effect of the tax overhaul, Q2 2018 income tax obligation declined 43% to $1.7 billion, from $3 billion in the year-ago period.
Segment-wise, Consumer Banking Revenues increased 8% to $9.20 billion. Global Wealth and Investment Management division ended the quarter with record client balances of nearly $2.80 trillion. Global Banking Revenues remained stable at $4.90 billion. Global Markets, excluding net DVA (Debit Valuation Adjustment), sales and trading revenue grew 7% to $3.60 billion.
During the quarter, net interest income grew 6%, to $11.7 billion, reflecting the advantage of rising interest rates. However, non-interest income declined 7% to $11.0 billion.
During the quarter ended June 2018, the bank set aside $827 million for credit losses, much lower than the $973.50 million anticipated by analysts. Notably, in 2Q18, non-performing loans fell to $6.181 billion, from $6.694 billion in the previous quarter and $7.127 billion in the similar quarter last year. In business divisions, average loan balances increased 5% to $872 billion. Likewise, average deposit balances increased 3% to $1.30 trillion. The bottom line was also aided by a 5% decrease in the non-interest expense to $13.30 billion.
The bank has also revealed its plan to invest $500 million in technology. While the efficiency ratio improved to 59, from 61, the return on average common shareholders’ equity increased to 10.75%, from 7.75%. The bank had a healthy Basel 3 CET1 ratio of 11.4% at the end of the second quarter. The Bank of America also returned $6.20 billion to shareholders in 2Q18 through dividends and share repurchases. Therefore, strong 2Q18 results, a decrease in credit loss provision, and investments in technology upgrades are expected to keep the stock bullish.
The price chart indicates support for the stock at 29. The next major support is only at 32. The price momentum oscillator has started rising. Therefore, we are expecting the stock to move up in the short-term.
To gain from the uptrend, we are planning to invest in a call option offered by one of our reputed binary brokers. However, we require the stock to trade near $29 at the time of investing in the option contract. Furthermore, we prefer the contract to remain valid for a period of one week.
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