Improving net interest margin
Bank of America’s net interest margin fell from 3.5% in 2003 to 2.3% in the last quarter of 2012. This was mainly due to lower interest rates resulting from the Fed’s QE efforts to boost the economy. The Fed’s QE will be coming to an end very soon, which will result in an increase in interest rates, thus helping the bank raise its net interest margin to the pre-crisis level of 3%. This should produce around $10 billion annually in extra interest income, assuming that no growth occurs in the interest-bearing asset base. In addition, extra net interest margin doesn’t really add incremental cost, so operating leverage is enormous in this situation. In other words, any increase in net interest margin will largely flow directly into operating income.
Share buyback
The Fed approved Bank of America Corp (NYSE:BAC)’s buyback application, worth $5 billion in common stock and $5.5 billion in preferred share redemptions for 2013. This shows Bank of America has grown and become smarter as a financial company. The company is going to retire $5.5 billion worth of preferred debt that’s yielding over 8%. This move alone will save the company $450 million annually in interest expense and reduce the number of outstanding shares, thus showing positive signs for EPS growth prospects.
JPMorgan Chase & Co. (NYSE:JPM) was one of four banks that did not receive the thumbs up from the Federal Reserve for their 2013 capital adequacy plan. Shortly after the Fed announcement, JPMorgan announced plans to raise the quarterly dividend from $0.30 to $0.38 per share and repurchase up to $6 billion in shares over the course of the next year. The $6 billion number comes in well short of the planned $15 billion share repurchase, but in response to the Fed’s report, as well as a desire to improve capital ratios, this seems like an appropriate response.
Foolish Takeaway
Bank of America Corp (NYSE:BAC)’s huge improvement from the previous year’s results clearly shows that the CEO’s, Brian Moynihan, efforts have started paying off well. The company has a fortress balance sheet. The Fed’s stress test showed that the bank is well positioned enough to sustain any financial crisis similar to that of 2008. An improving housing market, attractive valuations, share buybacks and expected improvements in net interest margins show that the turnaround is in full effect at Bank of America, and the company’s worst days are behind it.
The article Bank of America is back with a BANG! originally appeared on Fool.com and is written by Manoj Kochar.
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