Bank of America (BAC) Q1 2021 Earnings Report Preview: What to Look For

Bank of America Corp. (BAC) is coming off a difficult year in which earnings plunged amid an economy severely weakened by the COVID-19 pandemic. But the outlook is starting to brighten for the top retail bank in the U.S. Chief executive officer (CEO) Brian Moynihan is optimistic that the bank's earnings are set to increase substantially as interest rates rise and it leverages its low-cost deposit base to acquire higher-yielding assets.

Investors will be watching to see if Bank of America can end its recent streak of quarterly earnings declines when the company reports earnings on April 15, 2021 for Q1 FY 2021. Analysts forecast a significant boost in earnings per share (EPS) compared to the year-ago quarter. However, they expect revenue to decline for the sixth consecutive quarter.

Investors also will be focused on Bank of America's net interest margin, or what the bank calls "net interest yield." It is a key metric used in the banking industry that reflects the difference between the interest banks earn on their assets and the interest they pay out to depositors and other creditors. Analysts expect Bank of America's net interest margin to fall on a year-over-year basis, but to remain steady compared to the final quarter of FY 2020.

Shares of Bank of America have outperformed the broader market over the past year. But the stock has only been able to sustain steady outperformance since about mid-February of the current year. It mostly lagged the market for the previous ten months of the past year. Bank of America's shares have provided a total return of 68.6% over the trailing 12-month period, above the S&P 500's total return of 50.0%.

Bank of America Earnings History

The stock surged at the start of the year. But it began to retreat prior to the bank's Q4 FY 2020 earnings release on January 19 and continued to slide afterward. EPS for the fourth quarter fell 20.2% compared to the year-ago quarter, marking the fourth consecutive quarter of declines. Revenue fell 10.1%, the fifth consecutive quarter of falling revenue. Despite the declines, the bank noted that it was seeing signs of recovery, led by consumer spending, stabilizing demand for commercial loans, and other factors.

In Q3 FY 2020, Bank of America's EPS declined 10.3% compared to the same three-month period a year earlier. Quarterly revenue fell 10.8%, continuing its streak of declines that began in the final quarter of FY 2019. The bank set aside an additional $1.4 billion in provisions for credit losses, which hampered earnings. But it was significantly less than the $5.1 billion put aside in the previous quarter, a sign the bank was feeling more secure about the size of potential losses on loans.

Analysts are expecting EPS to jump 63.8% in Q1 FY 2021 from its depressed level in the year-ago quarter. Revenue, however, is expected to decline 4.0%, which would mark the sixth consecutive quarter of declining revenue. For full-year FY 2021, annual EPS is forecast to rise 40.4%, which would be the fastest growth since FY 2018. Annual revenue is expected to slip 0.1%, which would be the second year of declines.

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also be focusing on Bank of America's net interest margin. This key metric measures the difference between the income banks generate from credit products like loans and mortgages and the interest they pay to depositors and other creditors. It is analogous to gross margin reported by non-financial companies, which is the difference between sales and cost of goods sold. In extremely low interest rate environments, net interest margins get squeezed as banks lower rates charged to borrowers in order to remain competitive but they are reluctant to push rates they pay to creditors below the lower zero bound.

Bank of America's quarterly net interest margin ranged between 2.3% and 2.5% from Q1 FY 2017 to Q1 FY 2020. It then started to decline. The metric slipped to 1.87% in Q2 FY 2020 before reaching a low of 1.71% in Q4 FY 2020 as the Federal Reserve lowered interest rates to ease credit conditions amid the COVID-19 economic shock. Analysts estimate that the company's net interest margin will fall in Q1 FY 2021 compared to the same three-month period a year ago, but flat compared to the final quarter of FY 2020. The Q1 interest margin, like Q4, is expected to be the lowest in at least 16 quarters. For full-year FY 2021, analysts expect a net interest margin of 1.74%, the lowest in at least five years on an annual basis.