Bank of America (BAC), American Express (AXP), Discover Financial (DFS) – Bank & Credit Earnings – April 20, 2024

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Bank of America (BAC), American Express (AXP), Discover Financial (DFS) – Bank & Credit Earnings – April 20, 2024

Two things are true about this week’s batch of key credit earnings. More lagging indicators are still showing signs of notable deterioration as Y/Y comps continue to be difficult amid worsening macro and normalizing credit metrics. Conversely, provisions and reserve commentary from ultra-prime underwriters and less prime underwriters was actually mainly encouraging.

Bank of America

Results:

  • Beat revenue estimate by 1.6%.
    • Q4-23 revenue was hit by FDIC and Bloomberg Short Term Bank Yield (BSBY) index termination charges.
  • Slightly beat return on equity (ROE) estimates with a 9.40% ROE vs. 9.35% expected.
  • Slightly missed $0.76 GAAP EPS estimates by a penny.
    • Q4-23 profits were also hit by FDIC & BSBY charges.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Net Interest Margin (NIM) was expected to contract Q/Q with net interest income (NII) headwinds like seasonal income tax payments, but strong credit pricing discipline led to the positive surprise.

Balance Sheet:

  • $909 billion in average global liquidity sources vs. $854 billion Y/Y.
  • $296 billion in long term debt vs. $284 billion Y/Y.
  • $1.91 billion in average deposits rose 0.9% Y/Y. Internal expectations called for modest Y/Y declines in deposits.
  • $1.05 billion in average loans & leases rose 0.6% Y/Y.
  • Book value per share came in at $33.71 vs. $31.58 Y/Y. Tangible book value per share was $24.79 vs. $22.78 Y/Y.
  • Paid out $0.24/share in dividends vs. $0.22 Y/Y; diluted share count fell by 1.8% Y/Y.

Guidance:

BofA continues to expect Q2 to be its lowest quarter for NII generation. It’s still expecting three 2024 rate cuts and a 5.0% unemployment rate vs. 3.8% today. It sees expenses trending down throughout the year as well.

Credit Metrics:

Provision for credit losses came in at $1.3 billion vs. $1.1 billion Q/Q & $931 million Y/Y. The increase was driven by commercial real estate. Despite the rise, Bank of America released $179 million in credit reserves (meaning it thinks it needs fewer reserves to cover expected future losses) “due to a modestly improved macro outlook” per CFO Alastair Borthwick. Really good to hear.

But what was even better to hear? That the company expects a peak in net charge-offs for both its consumer and commercial businesses this quarter. That will further help with provisions for credit loss improvement, in addition to the reserve releases. Bank of America sees early-stage card delinquency trends improving on the consumer side. For commercial, more distance from front-loaded charge-offs within commercial real-estate is the biggest reason for optimism there. For now, total net charge-offs (the more lagging indicator piece of this equation) continue to rise and are $1.5 billion vs. $807 million Y/Y. About 2⁄3 of this is from consumer banking and higher credit card losses. This is due to more fragile macro and overall credit normalization. Credit card loss rate was 3.62% vs. 3.07% Y/Y. Commercial net-charge offs also rose due to commercial real estate office challenges. Overall net charge-off ratio was 0.58% vs. 0.45% Q/Q & 0.32% Y/Y.

Allowance for loan & lease loss ratio was 1.26% vs. 1.27% Q/Q & 1.20% Y/Y. This fell Q/Q as allowance for credit, loan and lease losses all modestly fell. Finally, non-performing loans and leases (NPL) ratio was 0.56% vs. 0.52% Q/Q and 0.38% Y/Y. This diluted the progress in allowance for loan and lease loss ratio, but only partially.


American Express (AXP)

Results:

  • AmEx barely beat revenue estimates by 0.1%. 
  • Beat pre-tax (EBT) earnings estimates by 10.2%.
  • Beat $2.96 GAAP EPS estimate by $0.37.
  • Beat 30.9% return on equity (ROE) estimates by a robust 340 bps.

2-yr comps used to avoid overly easy 3-yr comps.

ROcE = Return on Common Equity; EBT = earnings before tax.

Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases

Balance Sheet:

  • $54 billion in cash & equivalents vs. $41 billion Y/Y.
  • $60 billion in card receivables minus reserves vs. $57 billion Y/Y.
  • $121 billion in loans minus reserves vs. $105 billion Y/Y.
  • $134 billion in customer deposits vs. $121 billion Y/Y.
  • $51 billion in total debt ($2 billion is current).
  • $37.79 in book value per share vs. $32.84 Y/Y.

Guidance & Valuation:

The company reiterated guidance of 10% Y/Y revenue growth and 15% Y/Y EPS growth. Both growth rates are about 1 point better than expectations. This doesn’t include an expected Accertify asset sale, which will likely prop up GAAP EPS due to the expected gain.

AmEx trades for 17x GAAP EPS with EPS set to grow by 14% Y/Y in 2024.

Credit Metrics:

American Express caters to a more affluent credit community than most. Due to this and its strong underwriting, it continues to enjoy strong credit health, with expectations of that remaining the case. 

  • Overall principal net charge-off rate was 2.1% vs. 2.0% Q/Q and 1.6% Y/Y. This is still below 2.2% pre-pandemic levels. 
  • For the corporate portion of this metric, its charge-off rate is 0.5% vs. 0.8% pre-pandemic. 
  • For loans specifically, principal net charge-off rate was 2.3% vs. 2.1% Q/Q and 1.5% Y/Y. 
  • For card receivables principal net charge-off rate, AmEx reported 1.7% vs. 1.7% Q/Q and 1.9% Y/Y.
  • 30+ days past due as a % of total loans rose from 1.1% to 1.4% Y/Y, but for card receivables, it fell from 1.4% to 1.1% Y/Y.
  • The net interest yield on its loans was 12.0% vs. 11.7% Q/Q and 11.3% Y/Y. While delinquencies continue to modestly rise as expected, AmEx continues to price risk effectively.

“We expect to see this delinquency and charge-off rates remain strong with some continued modest increases in 2024.” – CFO Christophe Le Caillec

Total provisions were $1.27 billion vs. $1.44 billion Q/Q and $1.06 billion Y/Y. The reserve build for AmEx was lower than in any of the previous 6 quarters, offering more signs of forward-looking credit expectations easing.


Discover Financial (DFS) Credit Metrics 

Discover caters to broader credit bands (i.e. less credit worthy) vs. AmEx and Bank of America’s more affluent demographics. So we examine it to get the entire picture of the consumer from low to high credit scores.

Let’s start with the bad. Total net charge-off rate was 4.92% vs. about 2.70% Y/Y. Its recent vintages are showing higher delinquency levels as macro worsens and credit normalization plays out. Personal loan net charge-offs are also ticking briskly higher with that expected to continue near term.

The good news? Discover sees company-wide credit losses peaking in mid-to-late 2024. This compares to the commentary last quarter of losses peaking in the back-half of 2024. To me, that’s a reiteration, but you could make the argument that it’s a subtle upgrade to forecasts. It sees delinquency trends across the portfolio continuing to stabilize within its new cohorts. I’d still love to see the personal loan net charge-off rate peak, which did not happen this quarter as that rate rose by another 62 bps. This is more telling for players like Upstart, Pagaya and maybe Lending Club. 

As a read through for SoFi specifically, this isn’t all that relevant considering SoFi’s affluent demographic. AmEx is the better hint.

Discover also saw provisions for credit losses rise by $395 million to $1.5 billion. This was due to rising net charge-offs, but that hit was encouragingly offset by a $410 million reduction in reserves built vs. the Y/Y period. Its expectations for credit performance are stabilizing.

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