Bank of America Earnings Results
Metric Beat/Miss/Match Reported Value Analysts' Prediction
EPS Beat $0.86 $0.65
Revenue Beat $22.8B $21.9B
Net Interest Margin Miss 1.68% 1.71%

Source: Predictions based on analysts' consensus from Visible Alpha

Key Takeaways

  • Bank of America's net interest margin missed analyst expectations.
  • Net interest margin provides a measure of the difference between the rate banks charge borrowers and the rate they pay out to creditors. The margin gets squeezed in low interest rate environments.
  • CEO Brian Moynihan expects the economic recovery to accelerate.

Bank of America (BAC) Financial Results: Analysis

Bank of America Corporation (BAC) reported Q1 FY 2021 earnings that beat analyst estimates by a wide margin. The bank's quarterly revenue also surpassed expectations. Net interest margin, which Bank of America refers to as "net interest yield," measures the difference between the interest the bank earns on the assets it owns and the interest it pays out to depositors and other creditors, similar to gross margin that many other businesses report. Net interest margins have been compressed over the past year as the Federal Reserve lowered rates in 2020 to ease credit conditions amid the economic shock triggered by the COVID-19 pandemic. In extremely low interest rate environments, further interest rate decreases from the Fed induce banks to lower the rates they charge borrowers in order to remain competitive, but they have less room to lower the rates they pay out to creditors. Bank of America reported a net interest margin of 1.68%, missing analyst forecasts. Despite interest rates beginning to rise as the economy starts to recover, the bank's net interest margin fell to its lowest level in at least 17 quarters.

Bank of America also released $2.7 billion of reserves that were being held as a buffer against possible loan defaults, boosting earnings and suggesting a more confident outlook regarding borrowers' ability to keep servicing their debts. The bank had set aside $11.3 billion as provision for credit losses last year when the industry was readying itself for a wave of defaults amid the pandemic. But government stimulus programs helped to prevent that expected wave of defaults from happening. CEO Brian Moynihan said that despite lower interest rates continuing to pose challenges for revenue, credit costs had improved and the economic recovery appears to be accelerating. Bank of America did not offer any specific guidance for the next quarter or full year. Its shares were up about 1.2% in pre-market trading. Over the past year, the bank's shares have provided a total return of 72.3% compared to the S&P 500's total return of 44.9%.

Bank of America (BAC) Earnings Call Recap

Bank of America CFO Paul Donofrio said in the company's conference call that the bank was now expecting U.S. gross domestic product (GDP) to return to pre-pandemic level by the third quarter of the year. Just months ago, the expectation was that GDP would take until 2022 to reach those pre-pandemic levels. That improved outlook supports the bank's decision to draw down its loan loss reserves and suggests that it likely won't have to add to those reserves unless economic conditions change substantially. Bank of America also said that its board approved a $25 billion share buyback plan amid improving financial results. Repurchases reduce the number of shares outstanding, thus increasing the market value of remaining shares and benefitting shareholders who hold them. The Federal Reserve announced weeks ago that restrictions on buybacks put in place last year in the midst of the pandemic would be lifted on June 30.

Bank of America's next earnings report (for Q2 FY 2021) is estimated to be released on July 14, 2021.