Here's What I'm Watching in Bank of America's Earnings

Fool.com contributor Matt Frankel, CFP, thinks banks could be some of the biggest beneficiaries as life returns to normal in the United States, and Bank of America (BAC 1.32%) is one that he believes is especially worth watching. In this Fool Live video clip, recorded on July 1, Matt explains to fellow contributor Brian Feroldi what he'll be watching when the bank reports its second quarter results on Wednesday, July 14. 

Matt Frankel: I am watching, surprise, surprise, Bank of America. The banks are always among the first stocks to report earnings. They really help set the tone for earnings season because of that. Bank of America reports on Wednesday, July 14, so in less than two weeks from now. That's pretty quick after the end of the quarter to report earnings about two weeks after the end of the quarter.

Bank of America CEO Brian Moynihan recently said that consumer spending is up by about 20% from pre-pandemic levels right now. Huge surge of demand we've seen coming back in the market. I'm curious to see how that's affected the deposit base, how that's affected Bank of America's lending operations because lending fell dramatically during the pandemic. For obvious reasons, people just didn't have a lot to borrow money to spend. New cars aren't on lottery now, as I've mentioned in previous shows. Loans are down 14% year over year in the first quarter, the overall loan portfolio. The deposit base was up 19%. That's a lot when you're talking about Bank of America. That's hundreds of billions of dollars of extra deposits they have sitting on their balance sheet. I'm curious to see how consumers are spending that money. If they are taking out more loans.

I want to see what the net interest yield is doing. Interest rates really haven't ticked up dramatically, but they have ticked up a little bit. Bank of America's net interest yield, which is the profit margin for banks, was at 2.77% in the first quarter of 2020, right before the pandemic got really bad. It's been at about 1.9% for the past three quarters. That's a big dip in profit margin. Bank of America says that a 1% increase in overall market interest rates translates to $8.3 billion of additional net interest income per year. They're very interest rate-sensitive. I'm curious to see what that looks like.

The consensus is calling for $0.78 per share in earnings. The stock trades for a pretty low valuation. You two are growth investors so this is going to sound especially insane. About 13 times 2021 earnings the stock is trading for. This is Warren Buffett's favorite bank stock. It's his favorite for a reason. A lot of the second quarter wasn't too normal when it comes to just the reopening, but I want to see how the start of the reopening has affected their numbers and that's really going to tell me where they might be headed over the next couple of quarters.

Brian Feroldi: You know banks better than me. Is earnings the best metric to look at for banks to judge valuation?

Frankel: I like looking at price-to-book valuations. But you have to take that with a grain of salt because different banks trade for different premiums to their book value. Like if you look at JPMorgan's (NYSE: JPM) price-to-book valuations, it's much higher than like Bank of America or Citigroup (NYSE: C) or Wells Fargo (NYSE: WFC), and it's because it's a much higher-quality banking business. I like to look at price to book valuation, but in context with price to earnings, and net interest margins, and default rates and other metrics. But price-to-book, it tells you how much you're paying based on how much actual assets that bank has on its balance sheet.