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BofA (BAC) Q1 Earnings Lag, Provisions Up on Coronavirus Woes
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Bank of America’s (BAC - Free Report) first-quarter 2020 earnings of 40 cents per share missed the Zacks Consensus Estimate of 42 cents. This was attributed to reserve build of $3.6 billion for coronavirus-related crisis.
Following the release, the stock lost more than 6% in pre-market trading, indicating that investors are concerned about the financial impact of coronavirus. Nonetheless, the full session’s price movement is expected to depict a better picture.
A lower interest rate environment hurt BofA’s net interest income despite decent loan growth. Moreover, the company’s operating expenses rose moderately.
As expected, BofA’s advisory fees declined. However, solid underwriting business supported investment banking. Equity and debt underwriting fees grew 14% and 30%, respectively. This led to a 7% increase in investment banking fees.
BofA came out with robust trading numbers. Sales and trading revenues (excluding DVA) grew 22% from the prior-year period, driven by a 13% rise in fixed income trading and a 39% jump in equity trading income.
Performance of the company’s business segments, in terms of net income generation, was dismal. All segments, except Global Markets, witnessed a fall in net income. Overall, net income plunged 45% from the prior-year quarter to $4 billion.
Lower Rates Hurt Revenues, Expenses Up
Net revenues amounted to $22.8 billion, which marginally beat the Zacks Consensus Estimate of $22.5 billion. However, the reported figure was down 1% on a year-over-year basis.
Net interest income, on a fully taxable-equivalent basis, declined 2% year over year to $12.3 billion, mainly due to lower interest rates, partly offset by loan and deposit growth. Also, net interest yield was down 18 basis points (bps) to 2.33%.
Non-interest income grew marginally from the year-ago quarter to $10.6 billion.
Non-interest expenses were $13.5 billion, up 2% mainly due to continued investments in franchise.
Efficiency ratio was 58.82%, up from 57.10% in the year-ago quarter. Increase in efficiency ratio indicates deterioration in profitability.
Credit Quality Worsens
Provision for credit losses surged significantly on a year-over-year basis to $4.8 billion. The rise reflects a reserve build primarily due to dismal economic conditions, thanks to coronavirus concerns.
Net charge-offs increased 13% from the year-ago quarter to $1.12 billion.
However, as of Mar 31, 2020, ratio of non-performing loans and leases ratio was 0.39%, down 13 bps.
Strong Capital Position
The company’s book value per share as of Mar 31, 2020 was $27.84 compared with $25.57 in the corresponding period of 2019. Tangible book value per share as of first quarter-end was $19.79, up from $18.26 in the comparable year-ago period.
At the end of March 2020, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.1%, down from 11.9% as of Mar 31, 2019.
Our Take
BofA’s efforts to realign balance sheet, focus on digitizing operations, branch expansion plans and decent loan growth are likely to support growth going forward. However, increasing credit costs due to coronavirus-related economic slowdown pose a major concern. Further, near-zero interest rates will continue to hurt top-line growth.
Bank of America Corporation Price, Consensus and EPS Surprise
JPMorgan’s (JPM - Free Report) first-quarter 2020 earnings came in at 78 cents per share, which missed the Zacks Consensus Estimate of $1.70, thanks to a substantial rise in provisions owing to coronavirus-related concerns.
Wells Fargo (WFC - Free Report) reported first-quarter 2020 earnings of 1 cent per share, including a reserve build of $3.1 billion and certain other items amid coronavirus scare. The Zacks Consensus Estimate for the same was pegged at 22 cents.
KeyCorp (KEY - Free Report) is slated to announce quarterly results on Apr 15.
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This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
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BofA (BAC) Q1 Earnings Lag, Provisions Up on Coronavirus Woes
Bank of America’s (BAC - Free Report) first-quarter 2020 earnings of 40 cents per share missed the Zacks Consensus Estimate of 42 cents. This was attributed to reserve build of $3.6 billion for coronavirus-related crisis.
Following the release, the stock lost more than 6% in pre-market trading, indicating that investors are concerned about the financial impact of coronavirus. Nonetheless, the full session’s price movement is expected to depict a better picture.
A lower interest rate environment hurt BofA’s net interest income despite decent loan growth. Moreover, the company’s operating expenses rose moderately.
As expected, BofA’s advisory fees declined. However, solid underwriting business supported investment banking. Equity and debt underwriting fees grew 14% and 30%, respectively. This led to a 7% increase in investment banking fees.
BofA came out with robust trading numbers. Sales and trading revenues (excluding DVA) grew 22% from the prior-year period, driven by a 13% rise in fixed income trading and a 39% jump in equity trading income.
Performance of the company’s business segments, in terms of net income generation, was dismal. All segments, except Global Markets, witnessed a fall in net income. Overall, net income plunged 45% from the prior-year quarter to $4 billion.
Lower Rates Hurt Revenues, Expenses Up
Net revenues amounted to $22.8 billion, which marginally beat the Zacks Consensus Estimate of $22.5 billion. However, the reported figure was down 1% on a year-over-year basis.
Net interest income, on a fully taxable-equivalent basis, declined 2% year over year to $12.3 billion, mainly due to lower interest rates, partly offset by loan and deposit growth. Also, net interest yield was down 18 basis points (bps) to 2.33%.
Non-interest income grew marginally from the year-ago quarter to $10.6 billion.
Non-interest expenses were $13.5 billion, up 2% mainly due to continued investments in franchise.
Efficiency ratio was 58.82%, up from 57.10% in the year-ago quarter. Increase in efficiency ratio indicates deterioration in profitability.
Credit Quality Worsens
Provision for credit losses surged significantly on a year-over-year basis to $4.8 billion. The rise reflects a reserve build primarily due to dismal economic conditions, thanks to coronavirus concerns.
Net charge-offs increased 13% from the year-ago quarter to $1.12 billion.
However, as of Mar 31, 2020, ratio of non-performing loans and leases ratio was 0.39%, down 13 bps.
Strong Capital Position
The company’s book value per share as of Mar 31, 2020 was $27.84 compared with $25.57 in the corresponding period of 2019. Tangible book value per share as of first quarter-end was $19.79, up from $18.26 in the comparable year-ago period.
At the end of March 2020, the company’s common equity tier 1 capital ratio (Basel 3 Fully Phased-in) (Advanced approaches) was 11.1%, down from 11.9% as of Mar 31, 2019.
Our Take
BofA’s efforts to realign balance sheet, focus on digitizing operations, branch expansion plans and decent loan growth are likely to support growth going forward. However, increasing credit costs due to coronavirus-related economic slowdown pose a major concern. Further, near-zero interest rates will continue to hurt top-line growth.
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 #5 (Strong Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Performance & Earnings Date of Other Major Banks
JPMorgan’s (JPM - Free Report) first-quarter 2020 earnings came in at 78 cents per share, which missed the Zacks Consensus Estimate of $1.70, thanks to a substantial rise in provisions owing to coronavirus-related concerns.
Wells Fargo (WFC - Free Report) reported first-quarter 2020 earnings of 1 cent per share, including a reserve build of $3.1 billion and certain other items amid coronavirus scare. The Zacks Consensus Estimate for the same was pegged at 22 cents.
KeyCorp (KEY - Free Report) is slated to announce quarterly results on Apr 15.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2019, while the S&P 500 gained and impressive +53.6%, five of our strategies returned +65.8%, +97.1%, +118.0%, +175.7% and even +186.7%.
This outperformance has not just been a recent phenomenon. From 2000 – 2019, while the S&P averaged +6.0% per year, our top strategies averaged up to +54.7% per year.
See their latest picks free >>