In this second article of my series analyzing the growth drivers for banks like Bank of America Corporation (BAC), we’ll analyze the two key divisions and the growth numbers needed from those divisions to outperform in Q3. More importantly, we’ll also analyze how those numbers will set the stage for growth well into 2018, given the economic backdrop and the Fed’s monetary policy of rate hikes and balance sheet tapering.
Given the makeup of Bank of America, the bank is positioning itself for higher revenue going into Q4 and next year.
Outlined below are the two key areas to drive revenue as the economy grows:
Consumer Banking makes up roughly half of the loan book at Bank of America. The slide below is from a recent investor conference where Brian Moynihan cited the strategy of balancing the loan portfolio between commercial loans and consumer loans. As we can see, the loan book is evenly split between consumer and commercial loans.
Slide from investor presentation.
Within the consumer banking division, those credit products include mortgages, personal loans, credit cards, and auto loans to name a few.
- Mortgage lending should factor heavily in Q3 earnings. In the Q2 earnings presentation, Moynihan stated that mortgage lending was up by $18B but was down $3B y/y. And the bank still beat its earnings estimates. With the housing market in full swing, I’m looking for a strong showing from mortgages versus the last two quarters.
From Q2 earnings presentation – slide 13.
- As a result, in Q3, we should see a rise in mortgage originations and mortgages should contribute a greater share to the revenue stream of the bank versus the last two quarters. The reason for my optimism is the economy’s current 3% growth rate versus the 2% growth rate in 2016.
- Overall consumer lending rose 1.5% in Q2 versus Q1, (see green text). Consumer lending should also benefit from economic growth and lead to increases in auto loans and credit card usage. Credit cards are a…