The end of September marks the beginning of third-quarter earnings season. To help prepare Bank of America (NYSE:BAC) investors, here are the six most important things to watch for when the nation's second biggest bank reports earnings on Oct. 14.
1. Return on assets
Bank of America's stated goal is to earn 1% on its assets. This was a common occurrence for the Charlotte, N.C.-based bank before the financial crisis. Since then, however, it's come up short of this objective.
The good news is that Bank of America seems to be on the verge of returning to this hallowed ground. In the second quarter of this year, it generated a 0.99% return on assets. The question for investors is whether this was a fluke or rather the start of a sustainable trend in higher profitability.
2. Legal expenses
One of the reasons Bank of America's profitability came close to breaching the 1% ROA threshold last quarter is that its legal expenses declined sharply. The $2.2 trillion bank was able to reduce its outstanding legal claims by $7.6 billion in one fell swoop, following a New York court's ruling that time-barred billions of dollars in legal claims against the bank. And new claims filed against the bank fell from an average of roughly $2.5 billion a quarter down to only $224 million in the three months ended June 30.
It's an understatement to say that this is good news, as legal costs have been Bank of America's Achilles' heel for much of the past decade. Since 2008, it's incurred $64 billion worth of expenses from settlements and the cost to defend itself in court. This is something that Bank of America investors should watch closely when the bank reports earnings, as you'll want to see the figure continue to head in the right direction.
3. LAS costs
Bank of America established a separate division in 2010 to house the toxic and noncore assets that were causing it to hemorrhage money in the wake of the financial crisis. Because this unit, known as Legacy Assets and Servicing, or LAS, was tasked with winding these assets down, it serves as a progress report for Bank of America's success at putting its past mistakes behind it.
The thing you'll want to watch here are the number of full-time people employed by the LAS unit, which Bank of America reports in its conference call presentation (you'll be able to access this on Oct. 14 on the bank's investors relations page). Suffice it to say that you'll want to see this figure continue to decline, as it has since 2012.
4. Optimizing its distribution channels
One of the big questions in banking today is whether banks with expansive (and expensive) branch networks will be able to compete against more efficient operators that serve customers online and via mobile applications. The net result for a bank like Bank of America is that its branch count should be on the decline offset by the increased adoption among customers of its mobile app.
The financial supplement that Bank of America publishes each quarter shows both of these figures. Moreover, if you listen to its conference call, you'll probably hear its executives discuss these trends.
5. Stress test resubmission
The Federal Reserve stress tests the nation's biggest banks every year to determine if they have enough capital to sustain an economic downturn akin to the financial crisis. Banks that pass its test are then allowed to return more capital to shareholders, by way of dividends and share buybacks.
Bank of America has struggled with this annual ritual, running into problems in three out of the last five stress tests. It passed this year's test, but only conditionally, after the Fed found weaknesses in its capital planning process. It was thereby ordered to resubmit its capital plan by Sept. 30. Investors will want to listen into Bank of America's conference call to see if its executives offer any insight into the process.
6. Switching from defense to offense
There's been a noticeable change in the tenor CEO Brian Moynihan's public remarks over the past three months. Before that, he focused most of his attention on the bank's efforts to wind down expenses. But now he's spending much more time talking about revenue growth.
His timing isn't coincidental. As I've discussed previously, while its expense base now seems to be roughly in line with even its most efficient competitors, it generates far less revenue relative to its size than all three of its closest peers, JPMorgan Chase, Wells Fargo, and US Bancorp.
What Bank of America needs to do, in turn, is to increase its revenue at a faster pace than these other banks. It's reasonable for Bank of America shareholders to expect to see this trend this quarter.