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Bank of America Earnings: Look Past the Headline Numbers

By Matthew Frankel, CFP® - Oct 14, 2020 at 10:37AM

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The bank's revenue was a little light, but it wasn't all bad news.

Bank of America ( BAC 0.64% ) reported its third-quarter earnings on Wednesday, and it's fair to say that the market wasn't too happy with the results, as shares fell by more than 2% on the news.

The most likely reason for investor disappointment was on the revenue side. Bank of America's third quarter revenue came in at $20.3 billion, a decline of 11% from the same quarter in 2019. This was mainly fueled by the record-low interest environment, as net interest income plunged by 17% year over year.

Inside of Bank of America branch.

Image source: Bank of America.

Some of the news was quite strong

Despite the light revenue, there were some positive aspects of Bank of America's earnings.

For one thing, the bank earned $0.51 per share for the quarter, more than analysts had hoped for and more than enough to cover its dividend. Consumer loans were up by 5% year over year, and deposits were 21% higher than a year ago, as personal savings rates in the U.S. have spiked during the COVID-19 pandemic.

On the investment banking side of the business, Bank of America had its second-best quarter ever, with investment banking fee income 15% higher than a year ago.

Asset quality was a major concern heading into the third quarter for all major U.S. banks. In consumer banking, Bank of America's net charge-off ratio actually improved from 1.18% to 0.82% in the third quarter, and the bank released some of its reserves "due to an improved macroeconomic environment and lower credit card balances." Although the Global Banking segment added to its loss reserves, the net reserve build of $417 million was still welcome news after seeing the bank set aside billions for anticipated losses in the second quarter.

At the end of the third quarter, Bank of America's book value had risen by 5% year over year to $28.33, meaning that shares are currently trading at a 14% discount to book.

The bottom line is that while the low-interest environment is certainly depressing Bank of America's revenue, there seems to be more good news than bad in the third-quarter numbers, especially from a long-term investor's perspective.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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