Bank of America Earnings: What Happened with BAC

Key points to remember

  • EPS was $0.59 versus analysts’ expectation of $0.53.
  • Revenues fell short of analysts’ expectations.
  • Bond trading revenue was below analysts’ estimates.
  • Equity trading revenue was above the level estimated by analysts.
  • Net interest income decreased due to lower interest rates.

What happened

Bank of America reported mixed results for the fourth quarter of fiscal 2020. The bank reported EPS that beat expectations while revenue missed analysts’ forecasts. EPS and revenue were down from the prior year quarter. The bank’s equity trading revenue beat analysts’ estimates and rose year-over-year (YEAR). However, bond trading revenue was below expectations and was down year-on-year. CEO Brian Moynihan noted that the bank is seeing continued signs of recovery from the economic fallout caused by the pandemic.

(Below is the original Earnings Snapshot from Investopedia, published January 18, 2021.)

What to look for

Bank of America Corp. (BAC), which held the highest share of domestic deposits among U.S. banks in 2019, has seen declining revenue and profits over the past year amid ultra-low interest rates. The Federal Reserve swiftly eased monetary conditions last March, cutting its key interest rate to near zero to provide liquidity to a pandemic-shocked economy.But these low interest rates are eating into the profits of many banks.

Investors will be watching closely to see how well Bank of America overcomes two major challenges when it reports results on January 19, 2021 for the fourth quarter of fiscal 2020.These challenges are the low interest rate environment and the economic fallout from the COVID-19 pandemic. Analysts expect a substantial decline in earnings per share (PES) as revenues fall for the fifth consecutive quarter.

Investors will also focus on the bank’s trading revenue, coming from both its bond trading desk and its equity trading desk. enhanced volatility over the past year has provided significant opportunities for professional banking operators to increase their revenues. This helped offset the negative impact of low rates on the bank net interest margin, which measures the difference between the interest banks earn on the loans they make and the interest they pay on deposits. Analysts expect higher bond and equity trading revenue.

Bank of America shares have lagged the market over the past year. The bank’s underperformance gap widened as the broader market rebounded in the second half of March 2020 from the crash in late February. It wasn’t until early November, following the US presidential election, that the stock started to climb sharply and close the gap. Bank of America shares have provided a -1.2% total return over the past 12 months, well below the S&P 500 total return of 15.6%.

Source: Trading View.

The bank’s shares have been relatively unaffected by quarterly financial results over the past year. Bank of America posted a 10.3% decline in EPS in the third quarter of fiscal 2020, marking the third consecutive year-over-year quarter (YEAR) declines. Revenue fell 10.8%, the fourth consecutive quarter of year-on-year decline.The bank noted that the decline in net interest income was due to lower interest rates.

The decline in revenue was less severe in the second quarter of fiscal 2020, with a decline of 3.3%. However, EPS fell 49.6% from the same three-month period a year ago.The hit to the bank’s earnings included a $4.0 billion increase in its loan loss reserve, reflecting the need to build its liquidity reserve against bad debts amid the economic fallout from the pandemic.

Analysts expect further declines in EPS and revenue in the fourth quarter of fiscal 2020. EPS is expected to fall 28.6% while revenue falls 9.1% from the quarter of the year former. For the full year 2020, analysts forecast a 34.7% drop in EPS and a 6.0% drop in revenue. It would be the first declines for either financial figure in at least five years.

Bank of America key indicators
Estimate for the fourth quarter of 2020 (fiscal year) Q4 2019 (fiscal year) Q4 2018 (fiscal year)
Earnings per share ($) 0.53 0.74 0.70
Revenue ($B) 20.3 22.3 22.7
Bond Trading Revenue ($B) 2.0 1.8 1.5
Equity Trading Revenue ($B) 1.2 1.0 1.1

Source: visible alpha

As mentioned above, investors will also be watching Bank of America’s bond and stock trading earnings. The bank refers to these two income streams as fixed income, currency and commodity income, and equity income, respectively. Bond trading includes revenue from currency and commodity trading, but consists primarily of revenue from bond market trading. With net interest income down due to ultra-low interest rates, Bank of America is more reliant on its trading desks to generate revenue.

In the first two quarters of fiscal 2020, the bank’s bond trading revenue grew at rates not seen in at least 13 quarters. Revenues increased 29.1% in the first quarter and 40.2% in the second quarter. However, the bank had a tougher third quarter, as bond trading revenue fell 1.8% from the same three-month period a year ago. Analysts expect a 15.1% rise in the fourth quarter of fiscal 2020.

For the equity trading desk, the first quarter of fiscal 2020 was the big quarter, with equity trading revenue up 43.0%. This is the fastest pace of growth the bank has seen in at least 13 quarters. However, this pace slowed to 5.8% in Q2 and 4.6% in Q3. Analysts expect equity trading revenue to rise 15.8% in the fourth quarter of fiscal 2020.

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