Key Takeaways

  • EPS was $0.59 vs. the $0.53 analysts expected.
  • Revenue fell short of analyst expectations.
  • Bond trading revenue was lower than the level analysts estimated.
  • Equities trading revenue was higher than the level analysts estimated.
  • Net interest income declined, driven by lower interest rates.

What Happened

Bank of America reported mixed results for Q4 FY 2020. The bank reported EPS that beat expectations while revenue missed analyst forecasts. Both EPS and revenue were down compared to the year-ago quarter. The bank's equities trading revenue surpassed analyst estimates and was up year over year (YOY). However, bond trading revenue was below expectations and declined YOY. CEO Brian Moynihan noted that the bank is seeing continued signs of recovery from the economic fallout caused by the pandemic.

(Below is Investopedia's original earnings preview, published January 18, 2021.)

What to Look For

Bank of America Corp. (BAC), which held the highest share of domestic deposits among U.S. banks in 2019, has experienced falling revenue and profits over the past year amid ultra low interest rates. The Federal Reserve swiftly eased monetary conditions last March, cutting its key interest rate to near zero in order to provide liquidity to a pandemic-shocked economy. But those low interest rates are eating into many banks' profits.

Investors will be watching closely to see how well Bank of America is weathering two major challenges when it reports earnings on January 19, 2021 for Q4 FY 2020. These challenges are the low interest rate environment and the economic fallout from the COVID-19 pandemic. Analysts expect a substantial decline in earnings per share (EPS) as revenue falls for the fifth consecutive quarter.

Investors also will focus on the bank's trading revenue, both from its bond trading desk and its equities trading desk. Heightened volatility over the past year has provided significant opportunities for professional bank traders to boost revenue. That has helped to offset the adverse impact of low rates on the bank's net interest margin, which measures the difference between the interest banks earn on the loans they make and the interest they pay on deposits. Analysts are expecting both bond and equities trading revenue to rise.

Bank of America's shares lagged the broader market over the past year. The bank's underperformance gap widened as the broader market rebounded in the latter half of March 2020 following the late February crash. It was not until early November, following the U.S. presidential election, that the stock began to rise sharply and close the gap. Shares of Bank of America have provided a total return of -1.2% over the past 12 months, well below the S&P 500's total return of 15.6%.

One Year Total Return for S&P 500 and Bank
Source: TradingView.

The bank's stock has been relatively unaffected by quarterly financial results over the past year. Bank of America posted a 10.3% EPS decline in Q3 FY 2020, marking the third consecutive quarter of year-over-year (YOY) declines. Revenue fell 10.8%, the fourth consecutive quarter of YOY declines. The bank noted that falling net interest income was driven by lower interest rates.

The revenue decline was less severe in Q2 FY 2020, falling 3.3%. However, EPS plunged 49.6% compared to the same three-month period a year ago. The hit to the bank's earnings included a $4.0 billion increase in its loan loss reserve, reflecting the need to build up its buffer of cash against bad loans amid the economic fallout from the pandemic.

Analysts expect more declines in EPS and revenue in Q4 FY 2020. EPS is expected to fall 28.6% while revenue falls 9.1% compared to the year-ago quarter. For full-year 2020, analysts are forecasting a 34.7% decline in EPS and a 6.0% fall in revenue. Those would be the first declines for either financial number in at least five years.

Bank of America Key Metrics
   Estimate for Q4 2020 (FY)  Q4 2019 (FY)  Q4 2018 (FY)
 Earnings Per Share ($)  0.53  0.74  0.70
 Revenue ($B)  20.3  22.3  22.7
 Bond Trading Revenue ($B)  2.0  1.8 1.5
 Equities Trading Revenue ($B)  1.2  1.0  1.1

Source: Visible Alpha

As mentioned above, investors also will be watching Bank of America's bond and equities trading revenue. The bank refers to these two revenue streams as fixed income, currency and commodities revenue and equities revenue, respectively. Bond trading includes revenue on currency and commodity trading, but mostly consists of revenue from bond market trading. With net interest income down due to extremely low interest rates, Bank of America is more dependent on its trading desks to pull in revenue.

During the first two quarters of FY 2020, the bank's bond trading revenue grew at rates unseen in at least 13 quarters. Revenue rose 29.1% in Q1 and by 40.2% in Q2. However, the bank had a rougher third quarter, as bond trading revenue fell 1.8% compared to the same three-month period a year ago. Analysts expect a 15.1% rise in Q4 FY 2020.

For the equities trading desk, Q1 FY 2020 was the big quarter, with equities trading revenue rising 43.0%. That's the fastest pace of growth the bank has had in at least 13 quarters. However, that pace slowed to 5.8% in Q2 and to 4.6% in Q3. Analysts are forecasting equities trading revenue to rise 15.8% in Q4 FY 2020.