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BofA (BAC) Q3 Earnings Lag on Subdued Fee Income Performance
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Bank of America’s (BAC - Free Report) 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
Unexpected lower provisions along with improvement in trading and mortgage banking businesses drove JPMorgan’s (JPM - Free Report) third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35.
Citigroup (C - Free Report) 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 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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BofA (BAC) Q3 Earnings Lag on Subdued Fee Income Performance
Bank of America’s (BAC - Free Report) 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-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 - Free Report) third-quarter 2020 earnings of $2.92 per share. The bottom line handily outpaced the Zacks Consensus Estimate of $2.35.
Citigroup (C - Free Report) 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 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.
Have You Seen Zacks’ 2020 Election Stock Report?
The upcoming election could be a massive buying opportunity for savvy investors. Trillions of dollars will shift into new market sectors after the election. The question is, which sectors will soar for each candidate? Zacks has put together a new special report to help readers like you target big profits.
The 2020 Election Stock Report reveals specific stocks you’ll want to own immediately after the results are announced – 6 if Trump wins, 6 if Biden wins. Past election reports have led investors to gains of +71%, +83%, even +185% in the following months. This year’s picks could be even more lucrative.
Check out Zacks’ 2020 Election Stock Report >>