4 Things to Watch in Bank of America Corp's Earnings Report

Bank of America (NYSE: BAC  ) reports its second quarter earnings Wednesday, July 16, and this will be one of the most closely watched reports in the financial sector. The consensus is calling for earnings of $0.29, down from $0.32 during the same quarter a year ago, but a welcome improvement from the five-cent loss the company reported in the first quarter.

However, more important than the earnings number is how Bank of America is doing as a business and how its long-term strategies are playing out. Here are four things to pay particular attention to when the bank issues its earnings report.

Improvement in asset quality
In order for Bank of America to be healthy and to truly put the financial crisis behind it, the quality of the bank's assets needs to keep improving.

When Bank of America last reported, net charge-offs fell by about $200 million from the previous quarter, and by more than $1 billion from a year earlier. The amount of past-due loans as well as credit allowances also dropped.

However, to have $5.6 billion in past-due loans is still too high. As is well over $1 billion in charge-offs each quarter. Also, the company's provision for credit losses jumped from $300 million to $1 billion in the first quarter, so keep an eye on that number this time around.

Efficiency needs to improve
As my fellow contributor Patrick Morris pointed out, Bank of America was the least efficient bank among its peers for 2013.

Source: Wells Fargo Investor Relations

The company is well aware of this, and has been taking steps to improve the efficiency of its operations. For instance, the company has been closing branches and has been investing a lot of its resources into growing its mobile banking network, which so far has been successful.

Source: company's Q1 investor presentation

Over the past two years alone, Bank of America has added more than 5 million mobile banking users and has closed more than 500 of its branches, bringing the total down from 5,651 to 5,095. The company has said the number of branches could fall below 5,000 in 2014, so this is a number to watch, as well as its impact on the bank's efficiency ratio.

Source: company's Q1 investor presentation

The retail brokerage could become a real contender
Recently, I published an article about the bank's Merrill Edge discount brokerage and how it could potentially attract customers from other sector leaders like TD Ameritrade and E*Trade.

Merrill Edge offers the lowest commissions of any of its peers, and the bank has recently made their brokerage an even more appealing place to keep your assets. The bank has three tiers of perks that are offered to customers with total assets of $20,000 or more, including free brokerage trades, better rewards on credit cards, lower interest rates on loans, and more.

So far it looks like Merrill Edge is catching on nicely, with assets up by more than 35% in the past two years. Any growth in the brokerage business is a very good sign for the long-term, as brokerage customers are some of the best ones to have. For example, Wells Fargo's brokerage customers have four more products with the bank, on average, than customers without a brokerage account.

Credit cards and cross-selling
Speaking of cross-selling products, Bank of America has stepped up its efforts to sell its BankAmericard credit card products, particularly to its existing banking customers.

The bank issued more than a million new credit cards during the first quarter, a 13% year-over-year increase. However, the percentage of these cards issued to existing customers actually dropped by 1% to 63%.

Source: company's Q1 investor presentation

So, it would definitely be nice to see another million credit cards issued, it's far more important to the bank and its efficiency that the percentage of cards issued to existing customers increases. Studies have shown it costs much less to sell a product to a current customer than it does to go recruit a new one.

Bank of America has come a long way since the crisis ended, but there is still work to be done to turn the company into a stable and efficient company that can generate consistent, growing profits for years to come. And, this earnings report should give us some valuable insight into the progress toward that ultimate goal.

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