A month has gone by since the last earnings report for Bank of America (BAC). Shares have added about 10.6% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Bank of America due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
Bank of America’s Q2 Earnings Top, Provisions Up on Coronavirus Woes
Bank of America’s second-quarter 2020 earnings of 37 cents per share outpaced the Zacks Consensus Estimate of 28 cents. The earnings included the impact of a reserve build of $4 billion, mainly done to combat persistent economic slowdown.
A low interest rate environment and muted loan demand hurt Bank of America’s net interest income. Moreover, the company’s operating expenses rose moderately from a year ago.
Additionally, as expected, Bank of America’s total card income decreased 14% on a year-over-year basis. Advisory fees plunged 36% from the prior-year quarter.
However, solid underwriting business supported the investment banking business. Equity and debt underwriting fees jumped 140% and 55%, respectively. This led to a 65% surge in investment banking fees.
Further, BofA came out with impressive trading numbers. Sales and trading revenues (excluding DVA) grew 35% from the prior-year period, driven by a 50% jump in fixed income trading and 7% rise in equity trading income.
Performance of the company’s business segments, in terms of net income generation, was disappointing. All segments, except Global Markets, witnessed a drastic decline in net income. Overall, net income plunged 52% from the prior-year quarter to $3.5 billion.
Lower Rates Hurt Revenues, Expenses Rise
Net revenues amounted to $22.3 billion, which beat the Zacks Consensus Estimate of $21.8 billion. However, the figure was down 3% on a year-over-year basis.
Net interest income, on a fully taxable-equivalent basis, declined 11% year over year to $10.8 billion, mainly due to lower interest rates, partly offset by loan and deposit growth. Also, net interest yield contracted 57 basis points to 1.87%.
Non-interest income grew 5% from the year-ago quarter to $11.5 billion.
Non-interest expenses were $13.4 billion, up 1% mainly due to continued investments in franchise.
Efficiency ratio was 60.06%, up from 57.48% in the year-ago quarter. Increase in the efficiency ratio indicates deterioration in profitability.
Credit Quality Worsens
Provision for credit losses surged significantly on a year-over-year basis to $5.1 billion. The rise was due to a reserve build, primarily done to combat dismal economic conditions, thanks to coronavirus-related economic concerns.
Net charge-offs jumped 29% from the year-ago quarter to $1.1 billion.
As of Jun 30, 2020, non-performing loans and leases was 0.44%, which was unchanged year over year.
Strong Capital Position
The company’s book value per share as of Jun 30, 2020 was $27.96 compared with $26.41 in the corresponding period of 2019. Tangible book value per share as of second quarter-end was $19.90, up from $18.92 in the comparable year-ago period.
At the end of June 2020, its common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.4%, down from 12.0% as of Jun 30, 2019.
Management expects card deferral to decline in third-quarter 2020 driven by “the expiration in these payment observations.”
NII for the third quarter is anticipated to be adversely impacted by commercial loan paydowns, which will likely lower NII by around $200 million. Also, NII growth will likely be hampered by the impacts of longer-term asset repricing. Beyond the third quarter, NII will likely depend on loan growth “and/or redeployment of deposits into higher yielding securities rather than cash.”
Moreover, effective third-quarter 2020, the company will start accounting for merchant services separately and not through a joint venture. As a result, the business is likely to add roughly $200 million on a quarterly basis to overall operating expenses. Further, additional revenues for merchant services are expected to be roughly $100 million a quarter, which will likely improve as the economy recovers.
The effective tax rate (in absence of unusual items) is expected to be roughly 11% for the rest of 2020.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 8.23% due to these changes.
Currently, Bank of America has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Bank of America has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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