Bank of America Profit May Decline on Softer Consumer Demand

Bank of America Corp. (BAC), the second-largest U.S. bank by assets, will probably say net income fell in the fourth quarter as accelerating inflation crimps consumer demand and investment banking deals dwindle.

The firm is expected to say net income fell 9% to $6.5 billion, or adjusted earnings per share (EPS) of $0.75, from a year earlier, according to analysts tracked by Visible Alpha. Revenue probably rose by 9% to $24 billion thanks to rising interest rates.

^{Source: Visible Alpha}

Bank of America's earnings reflect an inflection point for lenders, which have benefited from higher rates that allows them to charge borrowers more for loans even as consumer spending declines. Banks may have a harder time boosting net interest income in the months to come, however, as the Fed slows its pace of rate hikes and customers expect higher rates on deposits. Piper Sandler banking analyst Scott Siefers says 2023 will bring a shift "from tailwinds to headwinds" for the industry.

Many banks are cutting workers to meet challenges ahead. Bank of America said in December it expects to leave some positions unfilled to bring down its headcount, while Goldman Sachs Group Inc. (GS) expects to fire thousands.

Bank of America shares have dropped about 29% in the last year, compared with a decline of about 17% in the S&P 500 Index.

The Key Metric: Net Interest Margin

Bank of America's net interest margin is a key measure of the gap between income the bank generates from credit products such as business loans and mortgages and the interest it pays to depositors and other creditors. It's analogous to gross margin, reported by non-financial companies, which is the difference between sales and cost of goods sold. The wider the margin, the more money a bank can make from charging interest than from paying out interest.

Banks can increase loan margins during periods of high interest rates, and the Fed's successive rate hikes throughout 2022 boosted Bank of America's net interest margin to 2.06% in the third quarter from 1.67% in the final quarter of 2021. Analysts predict it will widen to 2.22% in the last quarter of 2022. The Fed expects to raise rates in 2023, which could help Bank of America weather a broader economic downturn.