BofA (BAC) Q2 Earnings Top, Provisions Up on Coronavirus Woes

Bank of America’s BAC 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.

Following the release, the stock lost more than 3% in pre-market trading, indicating that investors are concerned about ambiguity of the financial impact of the coronavirus, going forward. Nonetheless, the full session’s price movement is expected to depict a better picture.

A low interest rate environment and muted loan demand hurt BofA’s net interest income. Moreover, the company’s operating expenses rose moderately from a year ago.

Additionally, as expected, BofA’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.

Our Take

BofA’s focus on digitizing operations and branch expansion plans are likely to support growth going forward. However, increasing credit costs due to coronavirus-related economic slowdown 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-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 Big Banks

As expected, a significant improvement in trading and mortgage banking businesses drove JPMorgan’s JPM second-quarter 2020 earnings of $1.38 per share. The bottom line surpassed the Zacks Consensus Estimate of $1.34.

Wells Fargo WFC incurred a loss per share of 66 cents in the second quarter 2020, which was attributed to a reserve build of $8.4 billion for the coronavirus outbreak-related crisis. The Zacks Consensus Estimate for the same was pegged at a loss of 7 cents.

Citigroup C delivered an earnings surprise of 6.4% in second-quarter 2020 on robust revenue strength. Earnings per share of 50 cents for the quarter handily outpaced the Zacks Consensus Estimate of 47 cents. The results, however, deteriorated significantly from the prior-year quarter.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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