Bank of America Corp (NYSE:BAC) quarter looked a lot like universal bank peers, with fees better, NII worse (trading mix impacts), expenses OK, and strong credit. Jefferies held BAC ests. flat for '18 with a different mix.
CMA posted a strong 2Q beat on good NII and fees, low core expenses and solid credit, but the stock proved to be crowded going into EPS. Jefferies expects consensus EPS to push higher even with the guide tweaks and remain decently above for '18 ($5.50).
Core fees of $11.1B (ex. gain on MBNA portfolio, net DVA loss, and secs. gains totaling $740mm) were $600mm higher vs. Jefferies model, with the vast majority of the beat coming from IB/trading and "other" income. Trading revs. were down 9% Y-Y (-14% Y-Y in FICC and +3% Y-Y in equities) vs. down 7%-17% for peers. Service charges and investment and brokerage fees also beat Jefferies est. modestly, with Y-Y growth rates accelerating Q-Q. NII of $11.2B missed our est. by $90mm, but the delta was due to higher interest costs to fund client activities in its equities trading business that positively impacted equities trading fees. The NII miss and trading fee beat (ex. DVA) netted to +$285mm vs. Jefferies model, but it does not run-rate forward given the episodic nature of trading and our view for a lower NII growth trajectory.
Expenses missed Jefferies est. by $230mm on better revs. While expenses run-rate modestly worse despite help from the MBNA sale (we est. $80mm peels off in 3Q), the $53B full-year '18 target is still live. Jefferies notes that BAC could see around $300mm of expense help in '18 if the FDIC surcharge ends by 2Q18. Credit was strong with NCOs down 3% Q-Q to 40bp, NPLs down 6% Q-Q to 74bp, and $180mm of reserve release. Card NCOs ticked up 13bp Q-Q to 2.87%, with more seasoning expected, but 2H seasonality (lower) should still prevail. Jefferies raises '17 EPS est. to $1.83 to reflect the 2Q beat and better recurring fees and keep '18 unch. at $2.15.