Consumer Banking Segment: The Key to Bank of America's Growth
By Andrew Brunton
Sep 13, 2018 | 10:13 AM
Retail lending The US economy is moving in a positive direction, as indicated by an improving GDP growth rate and a strong jobs market. That has led to an increase in credit demand from retail customers.
Consumer Banking is Bank of America’s ( BAC) largest segment, contributing ~40% to its total revenues. In the second quarter, BAC’s core Consumer Banking segment reported net income of $2.9 billion compared to $2.7 billion in Q1 2018 and $2 billion in Q2 2017. That robust growth came on higher revenues, lower spending, and reduced taxes.
The segment’s revenues grew 8% to $9.2 billion in the second quarter on 11% growth in net interest income and a 1.7% increase in non-interest income. An increase in net interest income was mainly driven by higher interest rates and robust deposit and lending growth.
The Federal Reserve’s hawkish monetary policy has also benefited US commercial banks ( XLF) since December 2015. It’s a general trend that spreads, and net interest margins for banks expand in a rising interest rate scenario. Therefore, the Fed’s rate hike policy has allowed banks to see improving margins. In the second quarter, Bank of America reported an expansion of 4 basis points in its net interest margin.
Loan growth Bank of America’s loan book expanded in the second quarter on corporate and retail lending. Its loan book grew 7%, which was in line with JPMorgan Chase’s ( JPM) growth. Deposits went up 5%. Its other two competitors, Wells Fargo ( WFC) and Citigroup ( C), saw limited loan book expansion in the second quarter.
Going forward, banks should focus on the manufacturing sector to improve US lending rates. The Trump administration’s focus on boosting the US manufacturing sector through tax reductions and trade tariff impositions is expected to accelerate domestic manufacturing. Bankers could thus target manufacturing-related industries to grow. Wall Street anticipates that Bank of America’s offtake may increase 3.3% year-over-year in the third quarter.
Bank of America's Expanding Balance Sheet
By Andrew Brunton
Sep 13, 2018 | 10:13 AM
Balance sheet expansion Bank of America’s ( BAC) balance sheet has been improving every quarter. Its total assets grew ~3.3% YoY (year-over-year) in Q2 2018 and reached ~$2.33 trillion. It was mainly driven by higher deposits, new assets, increased lending, rate spreads, and broking assets.
Bank of America’s deposits in Q2 2018 grew 5.2% YoY to $1.33 trillion. An improving US economy as shown by the GDP growth rate and a healthy jobs market has helped boost its deposits. Additionally, the company’s earnings from trading activities increased due to a highly volatile market.
Loans for the quarter grew ~2% YoY to $934.1 billion, mainly driven by increased credits to the commercial sector, which was partially offset by a decline in credits to the consumer sector. Credits to the commercial sector grew 4.7% YoY to $483.6 billion, while consumer loans inched down 0.6% to $449.8 billion.
The bank’s sustained focus on expanding its balance sheet with quality assets and share repurchase programs is helping it attain a higher ROE (return on equity) and ROA (return on assets). Return on average equity rose to 10.26% in Q2 2018 from 7.56% in Q2 2017, mainly due to higher revenues, lower credit costs, and lower taxes. Its second-quarter return on average assets improved 27 bps (basis points) YoY to 1.17%, from 0.90% in Q2 2017.
Peer performances Almost all major US banks ( XLF) have expanded the size of their balance sheets in the last couple of years, helped by macroeconomic growth driving deposits, loans, and markets. Banks have been benefiting from increased volatility in the market, which is boosting their trading revenues.
Bank of America’s major competitors, including Citigroup ( C), Goldman Sachs ( GS), and JPMorgan Chase ( JPM), have been seeing strong credit and deposit growth and higher spreads over the last few quarters. All these factors have enhanced their ROEs. In the second quarter, Citigroup’s ROE of 9.2% for the second quarter was 240 bps higher YoY. Goldman Sachs’s ROE expanded 230 bps to 11%. JPMorgan’s ROE improved 360 bps YoY to 14%.
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