Bank Of America Wins The Q2 Battle Of Banks
Saxo Bank | Jul 22, 2013 08:37AM ET
Bank of America is victorious among the major US banks with a 22.1 percent Q2 earnings surprise on tight expense control which was rewarded by the market with a two-day excess return relative to the S&P 500.
Major US banks continue to improve with BofA leading the pack
The 10 largest US banks have reported earnings and it is time to do a status. This earnings season's winner, when looking at both revenue growth, EPS surprise and the excess return around the earnings release, is Bank of America. The second largest bank measured by revenue increased its incpme by 3.4 percent year-over-year and saw earnings surprising 22.1 percent (see table below) driven by tight costs control and improving conditions across most business divisions.
The following conference call gave investors further confidence with positive remarks from management about the future in terms of expenses and income. The rising rates hit BofA positively through increasing value of its deposit book but negatively through an earnings hit from accumulated other comprehensive income (AOCI) driven primarily by unrealised losses on available-for-sale debt securities - in other words the hike in rates were higher than anticipated diluting the firms likely hedge positions against interest rate risk. The equity market rewarded BofA with a 5.2 percent two-day excess return relative to S&P 500 pushing the stock price to 14.75 (Friday's close), the highest level since early 2011.
Warren Buffett's 10-year warrants (700 million shares) with a strike price at 7.14 is now worth a lot. On top of that he gets six percent dividend yield. Remember how many bears that ridiculed Warren Buffett for his deal at August 2011? They are probably not laughing now. This might be the best deal that Warren Buffett has done in a decade.
Among the major US banks, Bank of America has also been leading on bolstering the balance sheet with the second best estimated Basel III Tier 1 Common ratio only exceeded by Citigroup (see chart below).
Get The News You Want
In aggregate terms, the major US banks increased revenue by 8.7 percent year-over-year which is an acceptable growth rate given the soft macro-economic environment in the second quarter and at this point in the business cycle. The average EPS surprise was 10.8 percent
Goldman Sachs boosted revenue by 30 percent year-over-year
The equity market's reaction is not the only scoreboard. Measuring the banks performance on revenue growth and EPS surprise, Goldman Sachs was indeed in a league of its own. With the rebound in revenue and profits, Goldman Sachs is now chasing the highs from early 2011 and late 2009 (see chart below).
The investment bank increased revenue by 30 percent year-over-year as business activity in its markets and investment banking division rebounded but was also fueled by increasing market share as other competitors are exiting capital intensive businesses such as fixed-income trading. The performance really highlights Goldman Sachs' leverage when business activity increases. If you believe the global economy will improve over the next two to three years, Goldman Sachs might be one of the best places to get exposure to the investment banking and trading activities following an expansionary economy as the franchise's operational leverage seems to be intact despite its recent years of negative press coverage.
The EPS surprise was the strongest among the major banks with an impressive 28.2 percent beat despite an increase in operating expenses. With the cost reductions carried out in the last couple of quarters waiting to fully impact earnings the potential for profit gains at Goldman Sachs remain good.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.