It was an up-and-down third quarter for Bank of America (BAC 3.35%) before the stock finished in the green. Investors will be anxious to take a look under the hood when the company presents third-quarter earnings results on Thursday, as the quarter has been difficult to gauge with the economic recovery, the spread of the delta variant, and inflation concerns all happening at the same time.
Here are two important numbers that I'll be watching closely.
1. Expenses
If you've been on Bank of America's last few earnings calls, you've undoubtedly heard analysts questioning management on elevated expenses in recent quarters. In the second quarter of the year, the bank ran expenses over $15 billion.
A big way that bank analysts and investors measure bank expenses is through the efficiency ratio, which measures total expenses as a percentage of total revenue. In the second quarter, Bank of America's efficiency ratio was roughly 70%, meaning that for every $0.70 the bank spent, it made $1 of revenue. That's not very good, as bank investors and analysts are usually looking for something under 60%, and the bank hasn't been close to that in about a year.
But Bank of America's second-quarter expenses were impacted by a $500 million donation to its charitable fund and $300 million in order to process state unemployment claims. If you remove these expenses and a few other items not normally in the run rate, such as COVID-related expenses, CEO Brian Moynihan said that expenses would have been much closer to $14 billion, which is a quarterly target for the bank for the rest of the year.
After four quarters of elevated expenses and an elevated efficiency ratio, I think investors are going to want to see some progress. Part of the reason for the elevated expenses has been COVID-related expenses, which have stuck around longer than anticipated. It will be interesting to see what management has to say about those expenses and what a normalized expense run rate truly looks like in the post-COVID world.
Image source: Bank of America.
2. Loan growth
The other big number investors will be watching is what kind of loan growth Bank of America sees in the third quarter. Not only is the bank the second largest in the U.S., but with Wells Fargo very limited in growing its balance sheet due to the asset cap it's operating under, Bank of America is also the premier commercial lender in the country. In mid-September at a financial services conference, the bank shared what commercial-loan growth looked like through July and August.
Image source: Bank of America investor presentation.
While commercial-loan growth isn't humming by any means yet, it did continue to rise despite the spread of the delta variant, which is good news. Alastair Borthwick, president of global commercial banking, said at the conference that loan balances in global banking stabilized in the second quarter, and much of the positives management saw in that period spilled over into the first few months of the third.
But Borthwick also said that commercial revolving lines of credit, which businesses can draw on for working capital and capital expenditures and are a big driver of commercial-loan growth across the banking sector, remain "flattish." It will be good to hear management's update on revolver utilization in September and through the beginning of October.
Another telling sign regarding future loan growth will be how much liquidity Bank of America puts into securities in the third quarter, because banks prefer to invest their liquidity into loans. Loan growth is particularly important for Bank of America's profitability because it is an incredibly asset-sensitive institution, meaning more of its assets such as loans reprice with interest rates. If it can grow loans as long-term interest rates climb (and the federal funds rate eventually follows), profitability at the bank can soar.
