Bank of America
Inside the Numbers
In the third quarter, Bank of America generated $20.45 billion in revenue which came in slightly under analysts' expectations of $20.8 billion. Earnings fell by 16% compared to 2019's Q3 at $0.51 per share. However, this was better than expectations of $0.49 per share.
Net interest income came in at $10.2 billion which was a 20% drop from last year's $12.3 billion. However, one silver lining was the management's confidence that this item will improve in the coming quarters. Another important metric - net interest margin fell short of analysts'
Out of the big banks, Bank of America is one of the most sensitive to interest rate swings as it has a vast deposit base. So, the interest rate environment has been a major headwind. And, there's little sign of relief given that the Fed is committed to its low-rate policy for years and has mused about "yield curve control" which would flatten the long-end even more.
This is bad in two ways - it makes lending less profitable and it also incentivizes refinancing in which a bank basically swaps a more lucrative loan for a less lucrative loan. All banks have been negatively impacted but some of its competitors like JPMorgan
Another bright spot is that that it only set aside $1.4 billion in reserves for credit losses which was much less than $5.1 billion in the previous quarter and is also consistent with management's comments that the worst has passed.
Stock Price Outlook
Bank of America's stock opened lower by 1.5% but finished 1.5% higher following results. So far this year, the stock is down by 29%, while the S&P 500 is 7% higher. It's also about 25% below its pre-coronavirus highs.
Usually, early in economic recoveries, financial stocks outperform as expectations for economic growth are upgraded, leading to upwards pressure on long-term rates. This isn't really happening this time. Banks have been major laggards since October 2018, when rates started to trend lower. Despite a reversal in many economic indicators and asset prices, interest rates haven't started moving higher.
Until this happens, banks should be treated like trading vehicles rather than long-term investments.