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BofA (BAC) Q4 Earnings Beat, Stock Slips on Lower Revenues

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Zacks Equity Research
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Bank of America’s BAC fourth-quarter 2020 earnings of 59 cents per share beat the Zacks Consensus Estimate of 56 cents. However, the bottom line was 21% below the prior-year quarter level.

The stock lost almost 2% in pre-market trading, indicating that investors are disappointed with the results, which were majorly hurt by dismal performance of consumer banking business.

Driven by rise in deal making activities during the fourth quarter, advisory fees jumped 45% from the prior-year quarter. Also, equity underwriting fees surged 141%. Conversely, debt issuance fees fell 10%. Nonetheless, total investment banking fees grew 36%.

Moreover, BofA’s trading numbers were decent. Sales and trading revenues (excluding DVA) grew 7% from the prior-year quarter. This was driven by 30% surge in equity trading income, while fixed income trading declined 5%.

Backed by improvement in consumer spending, BofA witnessed 3% growth in total card income on a year-over-year basis. Further, a substantial reserve release, leading to lower credit costs, supported the company’s financials.

However, as expected, a low interest rate environment and soft loan demand hurt BofA’s net interest income. Additionally, the company recorded a rise in operating expenses.

Furthermore, performance of the company’s business segments, in terms of net income generation, was disappointing. All segments, except Global Markets, witnessed a decline in net income. Overall, net income fell 22% from the prior-year quarter to $5.5 billion.

Lower Rates & Fall in Fee Income Hurt Revenues, Expenses Rise

Net revenues amounted to $20.1 billion, which marginally missed the Zacks Consensus Estimate of $20.4 billion. Further, the top line was down 10% on a year-over-year basis.

Net interest income (fully taxable-equivalent basis) declined 16% year over year to $10.4 billion, mainly due to lower interest rates and fall in loan balance. Also, net interest yield contracted 64 basis points (bps) to 1.71%.

Further, non-interest income decreased 4% from the year-ago quarter to $9.8 billion.

Non-interest expenses were $13.9 billion, up 5%.

Efficiency ratio was 69.29%, up from 59.24% in the year-ago quarter. Increase in the efficiency ratio indicates deterioration in profitability.

Credit Quality: Mixed Bag

Provision for credit losses plunged 94% on a year-over-year basis to $53 million. The fall was mainly due to a reserve release of $828 million. Also, net charge-offs declined 8% to $881 million.

As of Dec 31, 2020, non-performing loans and leases were 0.54%, up 18 bps.

Strong Capital Position

The company’s book value per share as of Dec 31, 2020 was $28.72 compared with $27.32 a year ago. Tangible book value per share as of fourth quarter-end was $20.60, up from $19.41.

At the end of December 2020, common equity tier 1 capital ratio (Advanced approaches) was 12.9%, up from 11.5% as of Dec 31, 2019.

Share Repurchase Plan

Concurrent with earnings release, BofA announced share repurchase authorization worth $2.9 billion for the first quarter of 2021. The bank noted that this is “the maximum allowed for the period, according to guidelines established by the Federal Reserve Board following the results of the latest Comprehensive Capital Analysis and Review examination.”

Conclusion

BofA’s focus on digitizing operations and branch expansion plans are likely to support growth, going forward. However, increasing credit costs, weak loan demand and near-zero interest rates are major concerns.

Bank of America Corporation Price, Consensus and EPS Surprise

Bank of America Corporation Price, Consensus and EPS Surprise
Bank of America Corporation Price, Consensus and EPS Surprise

Bank of America Corporation price-consensus-eps-surprise-chart | Bank of America Corporation Quote

Currently, BofA carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

 

Performance of Other Major Banks

Successful cost saving initiatives and unexpected release of reserves supported Wells Fargo’s WFC fourth-quarter 2020 earnings of 64 cents per share, which surpassed the Zacks Consensus Estimate of 59 cents. Also, the bottom line compared favorably with the prior-year quarter figure of 60 cents.

Citigroup C delivered an earnings surprise of 53.3% in fourth-quarter 2020 on reserve releases. Income from continuing operations per share of $2.07 for the quarter handily outpaced the Zacks Consensus Estimate of $1.35. Results were, however, down 3.7% from the prior-year quarter.

Unexpected large reserve releases, along with solid capital markets performance, drove JPMorgan’s JPM fourth-quarter 2020 earnings of $3.79 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.72.

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