Bank of America Q1 2022 Earnings Report Recap

^{Source: Predictions based on analysts' consensus from Visible Alpha}

Bank of America (BAC) Financial Results: Analysis

Bank of America Corporation (BAC) reported Q1 FY 2022 earnings that beat analysts' expectations. Earnings per share (EPS) came in above estimates but were down 7.0% compared to the year-ago quarter. Earnings got a small boost from a net reserve release of $362 million. Banks built up their loan loss reserves during the initial stages of the pandemic to protect against possible loan defaults.  Bank of America's quarterly revenue also exceeded consensus estimates, rising 1.8% year over year (YOY). Net interest margin, which the bank refers to as net interest yield, came in just below analyst forecasts.

The company's shares rose slightly in pre-market trading. Over the past year, Bank of America's shares have provided a total return of -4.0%, below the S&P 500's total return of 6.5%.

BAC Net Interest Margin

Bank of America's net interest margin for the fourth quarter was 1.69%, up on both a YOY basis and compared to the previous quarter. Net interest margin is a key metric that measures the difference between the income banks generate from credit products like loans and mortgages versus 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 are reluctant to push rates they pay to creditors below the lower zero bound. The Federal Reserve lowered interest rates in early 2020 in response to the economic shock triggered by the COVID-19 pandemic.

Rising inflation has prompted the Fed to act faster than originally expected in hiking interest rates. Last month, the Fed raised its key interest rate for the first time since 2018. Fed officials also laid out an aggressive rate hike schedule that could see interest rates rise significantly higher by the end of the year. The Fed has since indicated that it may be even more aggressive with rate hikes.

Bank of America said that its revenue and net interest income for the first quarter were partly driven by strong loan growth and benefits from higher long-end interest rates. The bank added that it expects to realize more benefits from rising interest rates.

While rising interest rates would help to boost Bank of America's net interest margin, many economists believe that the economy risks slipping back into recession caused by both the Fed rate hikes and global supply chain disruptions. They believe that the risk of recession is definitely on the rise. A recession would hurt Bank of America's lending activity and, if followed by lower interest rates, would compress its net interest margin again.

BAC Earnings Call Recap

Bank of America's trading operation posted falling revenue, though better than estimated, while the equities business reported record revenue. In a conference call after earnings were announced, Chief Financial Officer (CFO) Alastair Borthwick said that the company focused on clients and their trading execution “during what has been a very challenging environment,” while having invested “substantially” in that business.

Bank of America's next earnings report (for Q2 FY 2022) is expected to be released on July 18, 2022.