You would be hard-pressed to find a bank that is executing better than Bank of America (BAC), which has beaten earnings estimates in fourteen straight quarters. But with its shares plunging 31% year to date, Bank of America has fallen prey to the devastation and disruption the caused by the pandemic, namely business closures and waning consumer confidence.
The nation’s second-largest bank is set to report third quarter fiscal 2020 earnings results before the opening bell Wednesday. Bank of America has focused its business on consumers and lending, and thus is heavily reliant not only on the financial health of the consumer, it is also tied to the physical health of millions of borrowers — many of whom are out of work. Its consumer segment makes up some 40% of its revenue. Investors want to know how much pressure has been placed on its consumer business and the level of impact it has had on both its top and bottom lines.
Bank of America shares have fallen some 13% since August as investors have grown uneasy about the low interest rate environment that has pressured its revenue. On Wednesday investors will focus on metrics such as loan and deposit growth and get a sense of how the bank can grow revenue and and profits amid the low-rate environment. Elsewhere, investors will focus on the bank’s net interest margin (NIM), which is the difference between what the bank pays on deposits versus the rate it charges to lend money.
Given the low interest rate environment, which is expected to last through 2021, BofA’s NIM is expected to decline this quarter as well. As such, analysts on Wednesday will also listen intently for any commentary on how management plans to grow the top and bottom lines. Likewise, scrutiny will be placed on metrics such as loan and deposit growth to get a sense of how Bank of America can offset declines in other parts of the business.
For the three months that ended September, analysts expect the Bank of America to earn 47 cents per share on revenue of $20.82 billion. This compares to the year-ago quarter when earning were 56 cents per share on revenue of $22.95 billion. For the full year, ending in December, earnings are projected to decline 40% year over year to $1.64 per share, while full-year revenue of $86.48 billion would decline 5.8% year over year.
In the second quarter, Bank of America’s result were broadly consistent with those of its peers. Q2 EPS of 37 cents beats consensus of 28 cents. That, however, was 50% lower than the 74 cents per share earned in Q2 of 2019 and 3 cents less than the 40 cents earned in Q1. Also notable was the fact that Bank of America’s Q2 reserve build of $4 billion surpassed not only the $3.8 billion consensus, but also $3.6 billion in Q1. This was mainly due to a weaker economic outlook related to the pandemic.
Digging deeper into the results, credit card activity and service revenue declined significantly from a year ago, driven by the pandemic-induced slowdown in activity. The Q3 metrics are likely to be consistent with Q2 to slightly better given that businesses had begun to re-open. The question will be to what degree? Despite all of that, Bank of America stock is cheaply valued and trades on the assumption that business activity will remain weak through 2022. Given its strong dividend yield of 2.5% Bank of America looks like a bargain.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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