Key Takeaways

  • EPS was $0.37 vs. the $0.26 expected by analysts.
  • Net interest margin fell by even more than expected.
  • Revenue decreased by less than expected due to higher trading revenue.

What Happened

Bank of America mirrored a number of other banks this quarter, beating earnings and sales expectations as its trading revenue helped offset its lower interest income and substantial loan loss provisions. BAC's net interest margin also fell by more than expected. While its trading revenue did rise and help it exceed expectations on earnings, it did so by less than competitors like JPMorgan Chase or Goldman Sachs. However, it could be worse, it could be Wells Fargo, which reported a substantial earnings miss on $2.4 billion losses. Bank of America's stock is down -2.5% vs the S&P's -0.5% at time of writing.

(Below is Investopedia's original earnings preview, published 7/9/20)

What to Look for

Bank of America Corp. (BAC), one of the biggest U.S. banks, has seen its market value plunge from its recent high as the coronavirus pandemic has sent shockwaves through the stock market and the economy. This turbulence has placed downward pressure on the company’s giant consumer banking business, which is tied to the financial and health of millions of American borrowers and consumers.

Investors will focus on the extent of this economic impact on Bank of America’s bottom line when the company reports earnings on July 16 for Q2 FY 2020. For the quarter, analysts expect earnings and revenue to fall compared to the same quarter a year ago. These numbers reflect the continuing impact of the COVID-19 crisis, which has forced policymakers to restrict movement and business activity across the country in an effort to slow the virus’s spread.

Of particular concern to many investors will be a key metric, Bank of America’s net interest margin, which is expected to see a steep decline. This metric is an indicator of the bank’s ability to lend money at a higher interest rate than what it pays on deposits such as savings accounts and other money. As central banks such as the Federal Reserve continue to cut rates throughout the world, Bank of America has faced downward pressure on its net interest margins.

These trends have badly hurt Bank of America’s stock. Their shares had begun to outpace the broader market in the latter half of 2019, but now they are now drastically underperforming. As of early July, the company’s stock has posted a total return of -18.1% over the past 12 months compared to 5.3% for the S&P 500.

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

On April 15, Bank of America reported its earnings for Q1 FY 2020. At that time, adjusted earnings per share (EPS) missed estimates by $0.06, falling 43% to $0.40 compared to the same quarter a year earlier. Q1 FY 2020 marked the second time in three quarters that Bank of America's adjusted earnings per share had fallen, also having declined by 14.5% in Q3 FY 2020. Despite this, the stock rose in the months following the Q1 FY 2020 earnings report, supported in part by favorable jobs reports and signs of a reopening economy. In June, however, the shares shed much of their recent gains, at a time when many states have begun delaying or canceling their reopening plans due to rising COVID case numbers.

Looking forward to the bank’s upcoming Q2 FY 2020 earnings, analysts are expecting adjusted EPS and revenue to decline by 64.5% and 7.4%, respectively, compared to Q2 FY 2019. Analysts currently estimate adjusted EPS will plunge by 50.3% FY 2020. Due to the highly uncertain and volatile economic environment that we are currently experiencing, any forecast will be subject to a considerable margin of error.

Bank of America Key Metrics
  Estimate for Q2 2020 (FY) Actual for Q2 2019 (FY) Actual for Q2 2018 (FY)
Adjusted Earnings Per Share $0.26 $0.74 $0.63
Revenue (in billions) $21.4 $23.1 $22.5
Net Interest Margin 2.06% 2.45% 2.41%

Source: Visible Alpha

As mentioned, one metric that will be of particular importance is Bank of America's net interest margin. Banks often earn a profit by charging interest rates on loans to customers that are higher than the interest rates they pay for deposits. A higher net interest margin can help fuel a bank's profits. In normal times, moderate changes in interest rates may have little impact on a bank's net interest margin. However, the Fed's move to rapidly lower rates has squeezed banks as they lower the rates they charge borrowers. One major risk is high unemployment and rising medical expenses for some Americans could lead to spikes in delinquencies and defaults on the Bank of America's vast consumer loan portfolio.

Analysts expect Bank of America's net interest margin to fall by almost 0.4% in Q2 2020, compared to Q2 2019. That would be the lowest net interest margin the bank has posted in at least 14 quarters. Bank of America's net interest margin rose from 2.23% in 3Q FY 2016 to its highest level in recent quarters at 2.55% in Q4 FY 2018. Since then, the bank's net interest margin has declined sequentially for 5 straight quarters, from Q1 FY 2019 to Q1FY 2020. Low rates may further squeeze Bank of America's net interest margins if the current economic downturn steepens.