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Strong quarter has Bank of America thinking 100% payout ratio; stock jumps 6%

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Strong quarter has Bank of America thinking 100% payout ratio; stock jumps 6%

Bank of America Corp. handily beat the consensus analyst estimate for 2018 fourth-quarter earnings, and management said the bank should be well-positioned to continue returning income to shareholders.

The bank highlighted growth in deposits, strong operating leverage and benefits from tax reform. The company reported 6% year-over-year growth in revenue while cutting expenses by 1%, a process aided by the bank's focus on digital investment.

Investors were enthused by the earnings report, sending the stock up about 6% in early trading. Bank of America sent a lot of money back to shareholders in 2018, with common dividends and gross share repurchases totaling $25.5 billion, nearing the $28.1 billion of reported net income for the year.

During the bank's earnings call, an analyst asked whether investors should expect even greater capital returns this year considering the bank's high capital ratios. CFO Paul Donofrio said the bank increased its dividend by 25% and buybacks by $8 billion in 2018, which represented a payout ratio of more than 100% at the time.

"We would hope, expect, to have room to — at a minimum sustain that payout ratio, if not increase it," Donofrio said. "But we've got to see the [stress test] scenario first. That's the one caveat."

Large banks such as Bank of America have to submit capital return plans to the Federal Reserve for approval as part of an annual stress testing and capital planning exercise.

Consumer banking stood out in the 2018 results, delivering $12.0 billion of net income for the full year as the bank drove down the efficiency ratio for the segment to 45% by the 2018 fourth quarter. Average deposits in the consumer segment increased 3% year over year while the rate paid ticked up a mere 3 basis points. And the bank reported continued customer take-up of its online offerings with digital sales increasing and the bank reporting 4.8 million users of its Erica digital assistant offering since its launch in April 2018.

An analyst asked for the demographic component of the bank's robust deposit growth and increased technology adoption, asking whether the millennial generation was driving the growth.

"Any technology adoption people often attribute to millennials. But when you think about that kind of penetration of digital practice — 1.5 billion log-ins a quarter, 77% of the checks deposited not at the branch, i.e. through ATMs and mobile deposits you just don't have enough millennials to go around," said CEO Brian Moynihan. "So this is a broad-based trend that we've been driving."