BofA (BAC) Q3 Earnings Lag on Subdued Fee Income Performance

Bank of America’s BAC third-quarter 2020 earnings of 51 cents per share marginally lagged the Zacks Consensus Estimate of 53 cents. Also, the figure was 9% below the prior-year quarter level.

The stock lost almost 2.5% in pre-market trading, indicating that investors are disappointed with the results, which recorded a rise in provisions and unexpected subdued fee income numbers.

As expected, a low interest rate environment and soft loan demand hurt BofA’s net interest income. A reserve build in the commercial portfolio was one of the reasons for a rise in credit costs.

Further, despite rebound in deal making activities during the third quarter, advisory fees declined 17% from the prior-year quarter. Also, debt issuance fees fell 10%. Conversely, equity underwriting fees surged 147%. This supported total investment banking fees, which increased 8%.

Moreover, BofA’s trading numbers were decent. Sales and trading revenues (excluding DVA) grew 4% from the prior-year quarter, driven by a 3% increase in fixed income trading and 6% rise in equity trading income.

Backed by improvement in consumer spending, BofA witnessed 7% growth in total card income on a year-over-year basis. Additionally, the company recorded a fall in operating expenses.

Performance of the company’s business segments, in terms of net income generation, was disappointing. All segments, except Global Markets, witnessed a considerable decline in net income. Overall, net income fell 16% from the prior-year quarter to $4.9 billion.

Lower Rates Hurt Revenues, Expenses Down

Net revenues amounted to $20.3 billion, which missed the Zacks Consensus Estimate of $20.6 billion. Further, the figure was down 11% on a year-over-year basis.

Net interest income (fully taxable-equivalent basis) declined 17% year over year to $10.2 billion, mainly due to lower interest rates and fall in loan balance. Also, net interest yield contracted 69 basis points (bps) to 1.72%.

Further, non-interest income decreased 4% from the year-ago quarter to $10.2 billion.

Non-interest expenses were $14.4 billion, down 5%.

Efficiency ratio was 70.81%, up from 66.51% in the year-ago quarter. Increase in the efficiency ratio indicates deterioration in profitability.

Credit Quality Worsens

Provision for credit losses surged 78% on a year-over-year basis to $1.4 billion. The rise was due to a reserve build in the commercial loan portfolio. Net charge-offs rose 20% to $972 million.

As of Sep 30, 2020, non-performing loans and leases were 0.48%, up 12 bps.

Strong Capital Position

The company’s book value per share as of Sep 30, 2020 was $28.33 compared with $26.96 a year ago. Tangible book value per share as of third quarter-end was $20.23, up from $19.26.

At the end of September 2020, common equity tier 1 capital ratio (Advanced approaches) was 12.7%, up from 11.7% as of Sep 30, 2019.

Our Viewpoint

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-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

Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s JPM third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35.

Citigroup C delivered a positive earnings surprise of 38.6% in third-quarter 2020 on robust markets revenues. Earnings per share of $1.40 for the quarter handily outpaced the Zacks Consensus Estimate of $1.01. Results are, however, down significantly from the prior-year quarter.

First Republic Bank FRC delivered a positive earnings surprise of 16.7% in third-quarter 2020 aided by solid top-line strength. Earnings per share of $1.61 surpassed the Zacks Consensus Estimate of $1.38. Additionally, the bottom line climbed 22.9% from the year-ago 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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