Bank of America Earnings: What Happened

BAC net interest margin was lower than expected

Key Takeaways

  • Adjusted EPS was $0.51 vs. the $0.45 analysts expected.
  • Revenue was lower than expected.
  • Net interest margin was lower than analysts' forecast.

What Happened

Bank of America reported adjusted EPS that beat analysts' expectations for Q3 2020. However, both the bank's revenue and net interest margin were lower than expected. Amid the adverse economic impact caused by the COVID-19 pandemic, adjusted EPS and revenue were down compared to the same quarter a year ago. Lower interest rates pressured net interest margin, which was also down YOY. Shares of the company dropped in premarket trading.

(Below is Investopedia's original earnings preview, published October 13, 2020)

What to Look For

Bank of America Corp.'s (BAC) stock has been hit hard by the COVID-19 pandemic that has sharply slowed the U.S. economy. Despite that, CEO Brian Moynihan in mid-July expressed optimism about the future, noting that spending among the bank's customers was picking up. Investors will be looking for any signs of improvement when Bank of America reports earnings on October 14, 2020 for Q3 2020. Analysts estimate sizable year-over-year (YOY) declines in earnings and revenue.

In the Q3 results, investors will focus closely on Bank of America's net interest margin, a key metric reflecting the difference between the interest banks earn on the loans they make and the interest they pay to depositors. That difference tends to be compressed when interest rates are near or at zero. The Federal Reserve cut its key interest rate back down to zero earlier this year to support the U.S. economy amid the pandemic and has indicated that it will keep it low for years. Analysts expect Bank of America's net interest margin to plunge in Q3 compared to the same quarter a year ago and to the lowest level in at least 12 quarters.

The bank's shares had been outperforming the broader market late last year through about mid-February of 2020. But mounting fears over the economic impact of the pandemic sent its stock plunging along with the rest of the market. Since bottoming out in the latter half of March, the bank has underperformed by a wide margin. The stock has posted a total return of -6.7% over the past 12 months, about a third of the S&P 500's total return of 19.1%, as of October 11, 2020.

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

Bank of America's shares initially fell after reporting Q2 2020 earnings in mid-July, despite beating analysts' expectations. Adjusted earnings per share (EPS) plunged 49.6% YOY, the biggest decline since Q4 2017 as the bank set aside an additional $4.0 billion for provisions for credit losses, boosting total provisions nearly five-fold to $5.1 billion. Revenue fell 3.3%, the third consecutive quarter of YOY revenue declines.

Bank of America's stock initially dipped after CEO Moynihan's optimistic comments following the Q2 report, but then the shares rose through the latter half of July and the first half of August. But they then began to trade sideways before experiencing a pullback in mid-September along with the rest of the market. Since then, the bank's shares have begun to rebound again.

Analysts estimate that adjusted EPS will rise in Q3 2020 compared to Q2, but plunge YOY. Adjusted EPS is expected to decline 20.9%, which would mark the third consecutive quarter of YOY declines. Revenue is expected to fall 9.8%, the largest decline in at least three years.

For full-year 2020, analysts forecast that adjusted EPS will decline 42.0%, the first earnings decline in at least five years. That precipitous decline is expected to occur even though revenue is estimated to fall only 5.9%. That revenue drop, nonetheless, also would be the first annual decline since 2016.

Bank of America Key Metrics
  Estimate for Q3 2020 (FY) Actual for Q3 2019 (FY) Actual for Q3 2018 (FY)
Earnings Per Share $0.45 $0.56 $0.66
Revenue (in billions) $20.6 $22.8 $22.7
Net Interest Margin 1.79% 2.39% 2.45%

Source: Visible Alpha

One metric that will be of particular importance is Bank of America's net interest margin. Banks earn profit by charging interest rates on loans to customers that are higher than the interest rates they pay out to depositors and other creditors. The difference between interest earned and interest paid out is known as net interest income. Net interest income divided by a bank's average earnings assets equals the net interest margin. The higher the margin, the more profitable the bank.

In normal economic cycles steered by Federal Reserve policy, changes in interest rates often do not have a dramatic impact on a bank's net interest margin. Higher interest rates often lead to increases in both interest earned and interest paid out, and decreases in the case of lower interest rates. However, that's changed over the past decade with interest rates at historically low levels. These low interest rates have caused a squeeze in net interest margins: bank have lowered the rates they charge borrowers, but have been reluctant to push down too much the rates they pay depositors.

Bank of America's net interest margin fell to 1.87% in Q2 2020, more than half a percentage point below its level in the year-ago quarter and the first time it has fallen below 2.0% since at least Q3 2017. Analysts expect the bank's net interest margin to fall further to 1.79% in Q3 2020, a sharp drop from the 2.39% margin in the same three-month period a year ago. Sluggish economic growth, which is hurting both its corporate customers and consumers, is likely to continue to put pressure on Bank of America's margins.

Article Sources
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  1. The Wall Street Journal. "Bank of America Sees Reasons for Optimism in a Coronavirus Economy."

  2. Bank of America Corp. "Bank of America to Report Third-Quarter 2020 Financial Results on October 14."

  3. Visible Alpha. "Financial Data."

  4. The New York Times. "Fed Pledges Low Rates for Years, and Until Inflation Picks Up."

  5. Yahoo! Finance. "Bank of America Corporation (BAC): Analysis."

  6. Bank of America Corp. "Bank of America Reports Quarterly Earnings of $3.5 Billion, EPS of $0.37," Page 1.

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