Earnings season is now underway, and Bank of America (NYSE:BAC) just announced its fourth-quarter and full-year results. While the numbers and most of the company's earnings report look quite strong, the falling-rate environment seems to have prevented the bank from delivering an outstanding quarter like it did a few months ago.

With that in mind, here's a rundown of the good and the bad from Bank of America's Q4 earnings.

Bank of America branch lobby interior.

Image source: Bank of America.

The headline numbers look strong

On the top and bottom lines, Bank of America's results exceeded expectations. Revenue of $22.5 billion came in about $150 million higher than analysts had been projecting, and earnings of $0.74 per share beat estimates by $0.06.

Impressively, Bank of America's earnings increased by 6% on a per-share basis, despite a 1% year-over-year decline in revenue. While the company has done a great job of improving the efficiency of its business, it is also spending billions on stock buybacks, which has helped drive earnings higher.

A rebound in trading revenue and more

Just as we saw with rival JPMorgan Chase's (NYSE:JPM) earnings report a day earlier, Bank of America's trading revenue rebounded in the fourth quarter. A weak point in bank earnings for some time now, fixed-income trading revenue increased by an impressive 25% and was significantly higher than analysts thought it would be.

In addition to the surge in trading revenue, there were a few other positive areas of the report that investors should be aware of:

  • Loan growth was rather strong compared with rivals, with year-over-year growth of 7% in consumer loans and 6% in commercial loans. Deposits increased by 5% as well, showing that the bank is still attracting new money despite the growing presence of online competitors.
  • Bank of America's return on equity (ROE) came in at 11% for the quarter, while return on assets (ROA) was 1.13%. Both were a bit worse than last year's Q4, but this is to be expected given the plunge in interest rates during 2019 (more on that in the next section).
  • Over the past year, Bank of America has bought back about 830 million shares, or roughly 8.6% of the total outstanding shares at the end of 2018. Book value per share has risen by about 9% to $27.32, and this is the main reason why.

Falling interest rates hurt Bank of America's profitability

Unfortunately, Bank of America's earnings report wasn't entirely great. 2019 was a lower-interest environment than 2018 was, and this was reflected in several key areas of the bank's business. Net interest margin declined by 17 basis points to 2.35% and overall net interest income dropped by 3%.

In the consumer banking division, profits fell by 10% and the lower interest rates were the main reason cited.

This may sound like an alarming decline, but it's worth pointing out that Bank of America is the most sensitive of the major U.S. banks to interest rate fluctuations, so this wasn't entirely unexpected. Without getting too technical, the reason is that the bank has a higher proportion of non-interest-bearing deposits, so its interest margins are entirely dependent on how much it can charge consumers for loans.

The bottom line

Bank of America had a good fourth quarter, not a great one. Trading revenue was a strong point, but interest margins dropped a bit more than investors would like to see and profitability declined as a result.

One important takeaway, however, is that Bank of America's business is doing great. The bank has emerged as a leader in technology and sustainability, and the efficiency of its operations has improved dramatically in recent years. Unfortunately, forces beyond the bank's control (interest rates) took their toll, but this is a temporary issue for this well-run financial institution that's doing a great job of growing its business.

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