Why Bank of America Plunged Today

Shares of Bank of America (NYSE:BAC) fell hard on Wednesday, down as much as 8.7%, before recovering and ending the trading day with a 4.7% decline.

Bank of America reported earnings this morning, missing on both the top and bottom lines. On top of that, after market close yesterday, government regulators announced it was fining Bank of America $1.2 billion over a failure to properly monitor billions in suspect transactions through its system.

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Bank of America comes up light in investment banking

In the third quarter, Bank of America grew revenue 3.4% to $30.0 billion, while adjusted (non-GAAP) EPS grew 3.8% to $1.08. Even though adjusted EPS left out the regulatory fine, those metrics still missed analyst expectations.

Bank of America’s consumer banking and wealth management segments did fairly well, with revenue up 4% and 13%, respectively. However, investment banking was the weak link, down 11%, while sales and trading fell 5%.

Bank of America’s net interest yield expanded by 15 basis points, a positive. However, the Federal Reserve raised short-term interest rates in September, and today’s hotter-than-expected inflation report likely signals more rate hikes in the near future. That could pressure net interest margins going forward.

More troubling was the news of the fine. Yesterday, the Financial Crimes Enforcement Network (FinCEN) announced a $1.2 billion settlement with Bank of America for allegedly failing to report some $5 billion in suspicious transactions, including over $1 billion related to national security risks.

Bank of America logo over a red-tinted view of downtown office buildings

Image source: The Motley Fool.

But the stock recovered off its lows

Shares may have recovered from their lows because, beneath the surface, Bank of America’s fundamentals remain sound. Both investment banking and sales and trading are lumpy, cyclical businesses that depend on market movements and acquisition or IPO activity, which are largely outside management’s control.

Meanwhile, within Bank of America’s core lending business, the underlying fundamentals appear sound, with flat credit-loss provisions despite higher loan volumes and interest rates.

Bank of America remains a blue chip bank name to hold in any income-oriented equity portfolio.

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Bank of America is an advertising partner of Motley Fool Money. Billy Duberstein and/or his clients have positions in Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Why Bank of America Plunged Today was originally published by The Motley Fool

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