If you take a look at Buffett's heart, Bank of America, which was once Berkshire's second-largest holding stock, is probably one of them. However, there is no eternal love affair in the capital market. Since entering 2024, Buffett has continuously drastically reduced his stock holdings. After cutting Apple's position by half, he also switched his target to Bank of America, reducing his holdings by a total of several billion US dollars, and also allowed $Bank of America (BAC.US)$ It has dropped one place in Berkshire's position ranking.

Buffett's trend of reducing holdings is undoubtedly one of the market trends. It also put Bank of America's stock price to the test, and there was a short-term decline at one point. However, Bank of America's long-term stock price trend may also depend on its performance trend. On October 15, Bank of America will release its latest results. Every time a company releases results, it probably also means a good deal or investment opportunity. Before that, investors need to figure out how to understand its performance.

What do you think of Bank of America's performance? What do we need to focus on when it comes to performance? We mainly look at 3 key points: performance growth, risk indicators, and shareholder buybacks.

1. Stability of performance

Bank of America's revenue mainly includes two modules. The first module is net interest income, that is, the net income from interest on loans minus interest expenses on deposits, and the other is non-interest income, including commission fees, income from asset management operations, transaction income from market makers, etc.

Like most bank stocks, Bank of America's performance is generally stable and fluctuates slightly as the economic cycle changes.

Looking at revenue, taking the last 10 years as an example, Bank of America's overall revenue is fluctuating and rising. From 88.94 billion US dollars in 2013 to 98.58 billion US dollars in 2023, it only grew by about 10% in ten years. The performance was mediocre, but the results were steady.

In terms of net profit, Bank of America grew from 10.08 billion dollars in 2013 to 24.87 billion dollars in 2023, growing about 1.5 times over ten years. The growth rate seems to be quite good. During this period, Bank of America's net profit level can mainly be divided into two stages.

In 2013-2018, net interest income with higher profit margins continued to rise, while non-interest income with a relatively low profit margin was relatively stable. Despite little increase in revenue, Bank of America's net profit increased significantly due to an increase in overall profit margins, reaching $26.7 billion in 2018.

During the period 2019-2023, Bank of America's net profit fluctuated due to factors such as income tax or loan loss provisions, but overall stabilized, at around $25 billion for most of the time.

Bank of America's revenue and profits have remained generally stable in recent years, largely due to the hedging of the two major business modules of net interest income and non-interest income.

During the Federal Reserve's interest rate cut cycle, Bank of America's net interest income may decline, but for the financial market, the interest rate cut cycle means that there is plenty of liquidity and more active market transactions. At this time, Bank of America's revenue from transaction fees and asset management business is also likely to soar high.

Conversely, during the interest rate hike cycle, it is very beneficial for Bank of America's interest income, but interest rate hikes will impact the financial market, and non-interest income may also decline accordingly.

In recent fiscal quarters, with the end of the interest rate hike cycle, interest rate cut expectations have gradually increased. Bank of America's interest income has been difficult to increase, but deposit costs have risen. As a result, net interest income has declined year-on-year for three consecutive quarters, while its non-interest income has remained steady and rising in the past two quarters. Currently, quarterly revenue has remained near a new high in the past 3 years.

In the coming fiscal season, as the Federal Reserve opens a channel to cut interest rates in September, Bank of America's net interest income may also gradually be impacted. However, despite short-term uncertainty in performance, the focus of our observations may still be its long-term performance trend. If Bank of America's performance maintains a steady historical trend, investors probably don't need to worry too much; if its performance declines for several years, the certainty of its investment may be questionable.

2. Changes in risk indicators

The bank's business model essentially earns interest spreads, absorbs depositors' money at low interest rates, and then lends out at high interest rates. Therefore, the bank's own capital is very small compared to total assets, and the leverage ratio is extremely high. For example, Bank of America's balance ratio in the latest fiscal quarter was as high as 90.8%. This debt ratio level is unimaginable in most industries, but it is very common in the banking industry.

Banks' high leverage poses potentially high risks, and banks are one of the important cornerstones of the financial system. Once banks go out of business on a large scale, the entire financial market will be in turmoil. As a result, regulators have set some hard requirements on some of the bank's financial indicators.

The first indicator is the core capital adequacy ratio (CET1 capital ratio), which is a key indicator of a bank's financial soundness. It measures the ratio between a bank's core capital (common share capital plus retained earnings) and its risky assets. This is a regulatory target set by the Basel Committee on Banking Supervision, which stipulates a minimum core capital adequacy ratio of about 4.5%. In addition to this, the banking sector in various countries may also require additional capital buffers, but overall it is generally not higher than 11%.

Bank of America's core capital adequacy ratio in 2024Q2 is about 11.9%, which is significantly higher than the requirements of the Basel Agreement and also exceeds some other banking regulatory requirements.

The second indicator is the ratio of non-performing loans. This is the ratio of non-performing loans to overall loans, and it is also an indicator for measuring the quality of loan assets. Generally speaking, loans overdue for 90 days or more may be defined as non-performing loans. The more loans there are, the more bad debts may be, and the greater the bank's potential losses.

The ratio of non-performing loans in the US in 2024Q2 was about 0.52%. This ratio is low in the banking industry, and the loan quality is excellent.

The third indicator is the provision coverage ratio. This is the ratio between the funds prepared by banks for non-performing loans and the amount of non-performing loans. It represents the degree of bank coverage for potential losses. The higher this ratio, the more the bank pays attention to the risk of potential loan losses, and the more steady its operations are.

Bank of America's provision coverage rate for Q2 2024 was about 240%, which set aside sufficient credit loss reserves for potential loan losses, and was generally stable.

As for future financial reports, we can continue to observe the Bank of America's risk regulation indicators such as capital adequacy ratio, non-performing loan ratio, and provision coverage ratio to see if it can continue to maintain a low level of financial risk. If negative changes continue, it may be necessary to be cautious.

3. Stability of shareholder returns

Bank of America's overall performance has not increased much, and may not be attractive to investors who value the company's growth. However, from the perspective of shareholder returns, Bank of America may still attract the attention of some investors.

Listed companies' returns to shareholders are generally reflected in two aspects: dividends and repurchases. Among them, dividends are the most direct way to give back to shareholders, while buybacks can increase the company's return on net assets and surplus per share, and inject additional liquidity into the market. It can be said that it is a huge gain, and it is also very popular with shareholders.

Compared to many US listed companies, Bank of America's historical shareholder returns can be said to be very generous. From 2013-2023, Bank of America's cumulative dividend was about 63.7 billion US dollars, and the cumulative repurchase was about 115.2 billion US dollars, while the total net profit for the period was about 211.7 billion US dollars. The total amount of dividends and repurchases accounted for 85% of net profit, which is quite good in US stocks.

However, in 2022 to 2023, this ratio was only 50%. There is a huge gap between the shareholder return ratio of over 100% in previous years. Fortunately, in the first half of 2024, this ratio rose back to about 85%. In the future, we can observe whether the company can maintain a high dividend and repurchase ratio, thus bringing stable shareholder returns to investors.

Looking at this, you may have some new understanding of how to read Bank of America's results. It is worth mentioning that every time many star companies release results, it may mean a rare trading opportunity for different types of investors.

For example, if investors interpret past financial reports and combine the latest developments, they feel that a company's latest financial report will send some positive signals and benefit short-term stock prices, investors may consider buying active stocks, or buying call options, etc.

Conversely, if investors feel that a company's latest earnings report will not be optimistic and will put pressure on short-term stock prices, investors may consider short selling. The method of short selling may be to consider shorting stocks or considering buying put options, etc.

Of course, if investors feel that the long and short direction of a company's financial report is unclear, but the stock price may fluctuate greatly up or down after the earnings report is released, then investors may consider buying the volatility of its stock price and consider a cross-cutting strategy of buying both bullish and bearish options to seize potential opportunities.

Finally, to sum it up,

For Bank of America's financial reports, we can focus on its performance stability, changes in risk indicators, and the stability of shareholder returns.

In terms of performance stability, Bank of America's overall revenue has not fluctuated much in the past, and net profit has stabilized in recent years. We can focus on observing whether it can maintain stable long-term performance in the face of the impact of interest rate cuts.

In terms of risk indicators, we can observe whether Bank of America's core capital adequacy ratio, non-performing loan ratio, and provision coverage ratio can maintain steady historical performance in the future.

In terms of shareholder returns, Bank of America's past dividends and repurchases account for a relatively high proportion of overall net profit. We can observe whether the company can maintain a relatively generous shareholder return in the future.