Bank of America (BAC) Q3 FY 2021 Earnings Report Preview: What to Look For

Focus on BAC net interest margin

Key Takeaways

  • Analysts estimate EPS of $0.70 vs. $0.51 in Q3 FY 2020.
  • Net interest margin is expected to fall YOY.
  • Revenue is expected to rise amid the gradual economic recovery.

Bank of America Corp. (BAC) has seen its earnings recover in recent quarters after they plunged in 2020 when the economy pulled back due to the COVID-19 pandemic. Last year, profits were hurt by provisions for credit losses and lower net interest income. But profits are recovering this year, aided by the economic recovery and rising bond yields.

Investors will be looking to see if Bank of America's financial performance continues to improve when it reports earnings on October 14, 2021 for Q3 FY 2021. Analysts expect both earnings per share (EPS) and revenue to increase compared to the year-ago 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 significantly on a year-over-year basis, but to increase slightly compared to the previous quarter.

Shares of Bank of America have outperformed the broader market over the past year. The stock had been mostly lagging the market from around mid-October to early November 2020, but have outperformed ever since. Bank of America shares have provided a total return of 73.1% over the past year, well above the S&P 500's total return of 23.1%.

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

Bank of America Earnings History

Bank of America reported mixed earnings for Q2 FY 2021. EPS beat analysts' estimates by a significant margin, rising 174.0% compared to the year-ago quarter. It was the second straight quarter of rising EPS after four consecutive quarters of declines. Revenue, however, missed expectations and was down 3.9% year over year (YOY). The bank noted that consumer spending had far surpassed pre-pandemic levels and that loan levels were beginning to grow.

In Q1 FY 2021, Bank of America beat expectations on both earnings and revenue. EPS rose 116.1% compared to the year-ago quarter, the fastest pace of growth since the final quarter of FY 2018. Revenue growth was basically flat, rising a scant 0.2%. Still, that pace of revenue growth ended five straight quarters of declines. The bank said that low interest rates weighed on revenue but that credit costs improved and that the economy was showing signs of an accelerating recovery.

Analysts expect both EPS and revenue to rise in Q3 FY 2021. Analysts estimate that EPS will grow a robust 39.0% YOY, though that will mark a deceleration from the previous two quarters. Revenue is forecast to expand 6.3% YOY, which would be the fastest pace of growth since Q4 FY 2018. For full-year FY 2021, analysts expect EPS to rise 76.8%, which would be the fastest pace in at least five years. Annual revenue is forecast to grow 2.3%, a significant improvement from the 6.3% decline posted in FY 2020.

Bank of America Key Stats
  Estimate for Q3 FY 2021 Q3 FY 2020 Q3 FY 2019
Earnings Per Share ($) 0.70 0.51 0.56
Revenue ($B) 21.6 20.3 22.8
Net Interest Margin (%) 1.63 1.72 2.39

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 net interest margin in the three years prior to FY 2020 fell within a range of 2.35%-2.43%. In FY 2020, it fell to 1.89% as the Federal Reserve lowered interest rates to ease credit amid the pandemic. The bank's net interest margin in the first quarter of FY 2020 was 2.33% and gradually decreased to 1.71% by the final quarter of the year. It continued to fall in FY 2021, dropping to 1.68% in Q1 FY 2021 and 1.61% in Q2 FY 2021. In Q3 FY 2021, analysts expect a slight reversal for the first time since before the pandemic. They estimate that Bank of America's net interest margin will inch up to 1.63% in Q3 FY 2021. For full-year FY 2021, analysts expect the bank's net interest margin to be 1.63%.

Article Sources
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  1. Financial Times. "Short-term US Treasury yields reach 19-month high on rate rise bets." Accessed Oct. 13, 2021.

  2. Bank of America Corp. "Investor Relations." Accessed Oct. 14, 2021.

  3. Visible Alpha. "Financial Data." Accessed Oct. 12, 2021.

  4. Bank of America Corp. "2Q21 Earnings Press Release." Accessed Oct. 12, 2021.

  5. Bank of America Corp. "1Q21 Press Release." Accessed Oct. 12, 2021.

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