Bank of America (NYSE: BAC) shares were lower following the company's mixed earnings report. After a year of strong earnings, Bank of America is facing headwinds due to lower rates and the flattening yield curve. Like a lot of banks, its trading and M&A operations continue to grow, while other segments fell short of expectations. One tailwind continues to be lower default rates which is leading the company's loan loss reserves to be booked as earnings.
Inside the Numbers
In Q2, Bank of America generated $1.03 in earnings per share which topped analysts' expectations of $0.76 per share. This was a 178% increase compared to last year's Q2. In terms of revenue, the company missed consensus expectations at $21.5 billion vs $21.7 billion. However, this was a 4% decline from last year when the company's revenue benefitted from the Fed's liquidity injections and corporate bond purchases.
Equities trading was a bright spot as it topped expectations at $1.6 billion vs $1.4 billion. However, revenue from other sources of trading such as fixed income, currency, and commodities missed badly at $1.9 billion vs $2.4 billion. Overall, Global Markets revenue was down 14% from last year.
If the recent flattening of the yield curve remains so, then it's likely that Bank of America will continue to have to rely on trading for revenue growth. Due to the decline in long-term rates over the past couple of months, net interest income was down by 6%. However with market volatility lower, it will be more challenging for trading revenue to maintain its growth.
Stock Price Outlook
Bank of America didn't provide any forward guidance given uncertainty about the outlook. In the long-term, Bank of America remains a solid bet given its wide exposure to the American economy. The company is large enough and well-capitalized enough that it could survive any downturn and likely use it to increase market share.
However, in the near-term, the banks will continue underperforming especially if the yield curve remains flat. Further, the recent increase in inflationary pressures makes it less likely that we will see a significant fiscal or monetary stimulus to change this dynamic.