Key Takeaways

  • EPS falls 46% YOY, down to $0.40, far below analyst expectations.
  • Profit decline was driven by $3.6 billion increase in reserves to cover expected loan losses.
  • Net interest margin declined by less than expected.

What Happened

Bank of America reported a 43% decline in EPS for Q1, substantially greater than analysts expected. This loss was driven by a $3.6 billion increase in reserves to account for expected loan losses as the COVID-19 crisis ravages the economy. BAC's net interest margin declined, but by slightly less than was expected. BAC's stock is down 6.1% at time of writing.

(Below is Investopedia's original earnings preview, published 4/7/20)

What to Look for

Bank of America Corp. (BAC), one of the biggest U.S. banks., has seen its market value plunge by about $130 billion from its recent high as the coronavirus pandemic has sent the stock market and economy on a downward spiral. These trends pose a special threat to the company's giant consumer banking business, which is tied to the financial health of millions of consumers. The bank's investors will be looking at how much these economic disruptions are affecting the industry and Bank of America when it reports earnings on April 15, 2020 for Q1 2020. For the quarter, analysts expect net interest margin, earnings, and revenue to fall compared to the same quarter a year ago. These numbers are likely to give only an initial look at the damage from the pandemic, which didn't start to affect the U.S. and other economies until the last half of the quarter.

Investors are likely to focus especially closely on a key number: Bank of America's net interest margin. This metric is an indicator of the bank's ability to lend money at higher rates than it pays for deposits such as savings accounts, and is especially important as central banks cut rates worldwide. The big risk for Bank of America is that spikes in unemployment will affect millions of Americans. This risks causing a wave of consumer and business defaults that could trigger massive losses.

These concerns have badly hurt Bank of America's stock. The shares had begun to outpace the broader market in the latter half of 2019, but are now drastically underperforming. The company's stock has posted a total return of -21.3% over the past 12 months compared to the S&P 500's total return of -6.6%.

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

Bank of America's stock fell following a mixed earnings report for the final quarter of 2019. Earnings per share (EPS) beat estimates and rose 5.7% year-over-year (YOY), though the rise was at least partly due to increased share repurchases during the year.  Total net income (on a non per-share basis) for the quarter actually fell 3.9%, while revenue fell 1.5% YOY. 

Between the third and fourth quarter earnings reports, the bank's stock enjoyed a steady rise that outpaced the market. The gain was aided by Q3 EPS that beat expectations by 9.8%. Earnings per share still fell 15.2%, but the decline was partly due to a one-time impairment charge of $2.1 billion related to the termination of a payment-processing partnership with First Data Corp.  Revenue in Q3 grew a meager 0.4% YOY.

Analysts are expecting EPS and revenue to decline 7.6% and 0.7%, respectively, for Q1 2020. But considering the heightened uncertainty due to the rapid deterioration of economic conditions, any forecast will be subject to a considerable margin of error.

Bank of America Key Metrics
  Estimate for Q1 2020 (FY) Actual for Q1 2019 (FY) Actual for Q1 2018 (FY)
Earnings Per Share $0.65 $0.70 $0.62
Revenue (in billions) $22.8 $23.0 $23.1
Net Interest Margin 2.27% 2.51% 2.41%

Source: Visible Alpha

One metric that will be of particular importance is Bank of America's net interest margin. Banks earn a profit by charging interest rates on loans to customers that are higher than the interest rates they pay for deposits and other sources of funds. The higher the margin, the more profitable the bank. In normal times, moderate changes in interest rates should not be expected to have a significant impact on a bank's net interest margin. However, interest rates have been rapidly lowered in response to the COVID-19 pandemic. Such low rates can cause net interest margins to be squeezed as banks lower the rates they charge borrowers, but are reluctant to push the rates they pay depositors too low.

Analysts are expecting Bank of America's net interest margin to fall nearly one quarter percentage point to 2.27% for Q1 2020. That would be the lowest net interest margin the bank has posted in the past 12 quarters. Bank of America posted its highest net interest margin, 2.55%, during that 3-year period in Q4 2018. Since the start of last August, the Federal Reserve has cut interest rates a total of five times, which has brought the fed funds rate effectively down to zero. The Fed's moves are intended to bolster an economy in crisis and to encourage more loan growth. But low rates also are likely to squeeze Bank of America's net interest margins even more just as the economy slides into what many experts say will be a steep recession.