The 3 Most Important Things to Watch in the Bank of America Earnings Release

Earnings season is here, and there are three things you need to know about Bank of America when it announces its results next week.

Jan 10, 2014 at 7:00AM

Although it may seem like earnings season just ended, companies everywhere will begin announcing earnings next week, and there are three things to watch for when Bank of America (NYSE:BAC) reports its fourth-quarter (and full-year) earnings on Wednesday, January 15.

Bac

1. Its most important measure of profits
While Bank of America operates across almost every part of the financial services industry, it has a roughly even split between interest income (the difference between what it pays out on deposits versus what it earns on loans) and noninterest income (fees and the like) driving its revenue.

The profitability of this key bank income driver is measured through net interest income, and Bank of America has actually been in the middle of the pack, but still well behind leader Wells Fargo (NYSE:WFC):

Bank

Q3 2013 Net Interest Margin

Wells Fargo

3.38%

Citigroup (NYSE:C)

2.81%

Bank of America

2.44%

JPMorgan Chase (NYSE:JPM)

2.08%

Source: Company earnings reports.

Yet that gap was considerably greater in the third quarter of last year, as Bank of America was the only bank to see its net interest margin rise over the last year:

Images
Source: Company earnings reports.

This picture is even more dramatic when you compare Bank of America to JPMorgan Chase, which had an identical net interest margin in the third quarter of 2012, but the two have gone on divergent paths since then:

Images
Source: Company earnings reports.

It will be important to watch to see if Bank of America can continue improving this ever-important metric, especially knowing that its peers have been unable to do so.

2. Ensure its actual revenue rises
As a result of improving market conditions, banks everywhere have reduced their provisions for loan losses, or what they expect to lose on loans. As a result of accounting rules, the provision for loan losses is actually taken out of revenue. So if a bank has a revenue of $100, but expects to lose $10, its reported revenue will be $90. If that $10 drops to $5, its reported revenue will be $95.

All of this is to say the growth in banking revenues have looked really good over the past few quarters, especially at Bank of America:

Images
Source: S&P Capital IQ.

However, if you look at the revenue before loan losses, the pictures looks a little different:

Images
Source: S&P Capital IQ.

While there is improvement, in the third quarter, it appears that revenue is up 14% year over year, but after you exclude the provision, that number stands at 5%.

The provision for loan losses is critical to monitor, but in the fourth quarter of last year, Bank of America had $2.2 billion, versus just $300 million in the most recent quarter. So when checking Bank of America's fourth-quarter revenue, do a little digging to see just how much better (or worse) its tangible operations did relative to peers.

3. See how it's progressing on its cost-cutting initiatives
In a previous article, we looked at how a simple improvement to an average efficiency ratio -- a bank's expenses dividend by its revenues -- could result in Bank of America's income rising by nearly 60%, or $7.6 billion through the first nine months of this year.

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CEO Brian Moynihan has lauded Bank of America's desire to become more efficient through its Project New BAC initiative, and through the first nine months of the year, Bank of America has seen its efficiency ratio fall from 82% to 76%, which is a strong start, but still well below where it should be.

Bank of America has long been beset by litigation costs, so a return to an efficiency ratio in the fourth quarter that is even below average (versus at the bottom, where it currently stands) would be an encouraging sign.

All in all, Bank of America had a strong 2013, and its stock performance in 2014 is off to a solid start once more. However, keep an eye on these three things to help provide guidance on how the year may actually play out for the bank.

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Fool contributor Patrick Morris owns shares of Bank of America. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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