Financials Bank of America Corp (BAC): Morgan Stanley Ups EPS Estimates on Higher Fees, Better Credit

Bank of America Corp (BAC): Morgan Stanley Ups EPS Estimates on Higher Fees, Better Credit

Published By Blake Audett at October 18, 2016 02:37 pm

Bank of America Corp (NYSE:BAC) was able to report its first profit jump in nearly three quarters yesterday, warding off fears of another drop as expenses continued to fall and bond trading improved. The bank was able to see improvement in profits after trading resurged this quarter, much like its rivals Citigroup and JPMorgan. Morgan Stanley has in turn released a positive research note on the company reiterating its rating of Outperform and upping its estimates on earnings for the next three fiscal years.

Quarterly profit for the third quarter stood at its highest in nearly a decade. net profit attributable to shareholders inclined higher by 6.6% to $4.45 billion for the quarter with earnings per share coming at $41 cents; EPS easily swept past the consensus estimate of 34 cents and was a jump from 38 cents apiece that the company reported the comparable period last year. Revenue for the quarter jumped 3% from comparable quarter to $21.64 billion, surpassing the analysts’ expected $20.97 billion.

The firm says that the big beat from Bank of America on operating profits was due to a stronger beat on revenue. Expenses were higher by 1 cent from comparable quarter but depicted no change from quarter over quarter. Expense ratio also came down by 100 basis points from last quarter and was 289 basis points lower than expected.

 Morgan Stanley is of the opinion that going forward, there is likely to be more room for Bank of America to lower its expense ratio, especially in the Global Markets and IB segments where the expense ratio was marginally higher from last quarter. The biggest decline in expense ratio came in the Consumer Banking segment from 56.6% to 54.8%. Notably, CEO Brian Moynihan’s campaign to curtail expenses also paid off as costs fell in all the four major operational units.

The firm is expecting expense ratio to improve from 65% in fiscal year 2016 to 59% in the next two years. After the earnings release, the firm now expects the bank to report operating EPS of $1.59 apiece in fiscal 2017, and $1.88 in fiscal 2018 - both 3 cents higher from prior projections. Lower provisions and higher investment banking fees and trading would help Bank of America reach these profit targets.