Key Points
Bank of America delivered strong second-quarter revenue and earnings growth.
Every business segment posted double-digit net income growth.
Much of the growth came from unusually strong trading and investment-banking activity, which may not be repeatable.
On Tuesday, July 14, Bank of America (NYSE:BAC) blew past Wall Street's expectations and delivered results for one of its strongest quarters in years.
Second-quarter revenue grew about $4.2 billion since last year (from $27.4 billion to $31.6 billion), a roughly 15% surge that beat Wall Street's estimate of $30.8 billion. Earnings, likewise, rose 34% to $1.21, a comfortable beat on analysts' estimate of about $1.13. Just as important was the bank's 17% return on average tangible common equity -- a key measure of the bank's profitability -- which is well within its target range of 16% to 18%.
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Indeed, every one of Bank of America's business segments reported double-digit net income growth, with total net income growing 27% to $9.1 billion. But does that strong performance make the bank stock a long-term buy today? Let's take a look.
Image source: Bank of America.
Bank of America's underlying business is getting stronger.
Most people will recognize Bank of America as a big bank. But beyond brand recognition, the nature of its business might not be as easy to put into words.
In a nutshell, Bank of America operates several financial businesses under one brand. Its most familiar business -- the banking side -- takes deposits from consumers and companies, then uses that money to fund credit cards, mortgages, and other loans. The difference between the interest Bank of America collects from borrowers and the interest it pays to depositors is a huge factor in its profitability.
In that regard, Bank of America's latest quarter was very encouraging. Net interest income rose 9% to roughly $16 billion, while average loans and leases also grew 8% to about $1.2 trillion. Put differently, Bank of America lent more money and made earned more from these interest-bearing assets -- a healthy sign, so long as borrowers keep paying.
The strongest part of the quarter warrants a closer look
Bank of America also saw strong growth across its wealth management, trading revenue, and investment banking services. But it's this growth, more than anywhere else, that gets my spidey senses tingling.
To set the stage properly, here's what Bank of America reported: sales and trading revenue rose from $5.3 billion to $7.1 billion, contributing about $1.8 billion of additional revenue. Likewise, investment banking fees grew to $2.1 billion from $1.4 billion, an increase of about $700 million.
Together, these businesses generated roughly $2.5 billion in additional revenue, nearly 60% of the company's total year-over-year revenue growth of $4.2 billion.
This is phenomenal growth, but I don't think investors should treat it as a "new normal." Indeed, much of the second-quarter growth on this side of the business likely was benefited from unusual circumstances: the Iran conflict whipped up big waves of market volatility, whereas blockbuster offerings like SpaceX probably helped lift the company's investment-banking fees.
That's not to say the company's wealth management and Wall Street operations are weak; clearly, the contrary is true. But we shouldn't assume that this quarter's growth will repeat, since much of it seems driven by a hot market rather than a fundamental change in the business.
Is Bank of America a buy after its second-quarter earnings?
Yes, I would call Bank of America a buy right now. Although I'd caution against expecting this quarter's trading-fueled growth to repeat, it's encouraging to see growth in its core banking operation. Adding to this, Bank of America's recent stress test results -- which showed it can hypothetically withstand a severe economic downturn -- and the long-term investment case look solid.
Bank of America is an advertising partner of Motley Fool Money. Steven Porrello has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.