Why Bank of America Rallied Today

Shares of large money center bank Bank of America (NYSE: BAC) rallied on Wednesday, up as much as 3.8% before retreating to a 1.8% gain as of 3:54 p.m. EDT.

Bank of America delivered an earnings report today that was everything an investor could ask for, from a revenue and earnings beat to positive commentary on private credit exposure and lower-than-expected credit provisions. So, it was no surprise to see the stock climb, despite already rising over 40% in the past year.

A beat across the board

In the first quarter, Bank of America reported 7% revenue growth to $30.3 billion, with earnings per share up nearly 25% to $1.11. Both figures handily beat expectations.

Underlying these beats were solid fundamentals. Both net interest income and noninterest income beat expectations, while provisions for credit losses of $1.34 billion came in well below expectations of $1.5 billion.

Credit provisions have been a key focus for analysts this year amid rising fears over the private credit industry. For its part, Bank of America noted that only about $20 billion of its wholesale loans are to private credit lenders, which is slightly lower than other major banks have reported. Loans to business development companies, considered the riskiest segment of the private credit industry, totaled less than $2 billion. Moreover, management emphasized that the private credit portfolio was backed by first-lien loans to a diversified group of companies with solid EBITDA (earnings before interest, taxes, depreciation, and amortization) coverage.

All of these positive metrics led to a 16% return on tangible common equity, which was more than a two percentage point improvement relative to a year ago. That's immensely positive, as a bank's efficiency shows how productively it uses its capital.

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Bank of America has solid fundamentals

Despite Warren Buffett's Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) selling down a large portion of its Bank of America position, the stock still ranks as the third-largest in Berkshire's equity portfolio. Earnings reports like this one show why Buffett liked the stock in the first place; management is executing its smart-growth strategy, with above-GDP growth despite conservative lending, and technology investments leading to ever-greater efficiencies.

Bank of America stock still trades at a reasonable 14.2 times earnings per share, 1.4 times book value, and 1.9 times tangible book value. Those aren't unreasonable valuations for a bank displaying solid growth and mid-teens returns on equity.

Bank of America is an advertising partner of Motley Fool Money. Billy Duberstein and/or his clients have positions in Bank of America and Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.