When Bank of America (NYSE:BAC) reports first-quarter earnings on April 14, there are three numbers that investors should pay particularly close attention to: its return on assets, efficiency ratio, and the performance of its global markets division.
1. Return on assets
If you're wondering why Bank of America's shares trade for a 40% discount to book value, look no further than its return on assets. This is one of two main profitability metrics used by bank analysts to gauge the performance of a bank. It's calculated by dividing a bank's annualized net income by its total assets.
As a general rule, banks strive to generate a 1% return on assets. That translates into a roughly 10% return on equity, which in turn means that a bank is earning its cost of capital -- that it's creating value, in other words, as opposed to destroying it.
Although Bank of America has come up short in this regard ever since the financial crisis, the nation's second biggest bank by assets is heading in the right direction. It generated a 0.74% return on assets last year compared to only 0.23% in 2014. Investors will want to see this figure continue to improve this year.
2. Trading/investment banking revenue
The first quarter is widely expected to be a challenging one for bank's trading and investment banking operations. According to The Wall Street Journal,
Global investment-banking revenue -- fees paid for advice on mergers and acquisitions, debt and equity underwriting and syndicated loans -- stands at $12.8 billion this year, according to Dealogic. That is down 36% from the first quarter of 2015 and marks the lowest quarterly total since the first quarter of 2009 at the height of the financial crisis.
That's horrible news for Goldman Sachs and Morgan Stanley, which, for all intents and purposes, are stand-alone investment banks. Making things worse is the fact that revenue from trading operations is also widely expected to drop. As Bloomberg News reported in early March, Citigroup expects its trading revenue to drop by double digits in the first quarter compared to the same period last year:
First-quarter revenue from fixed-income and equity trading will probably drop 15 percent, Chief Financial Officer John Gerspach said during an investor presentation Tuesday. That would make 2016 the fourth straight year that the company's revenues from those operations have declined in what is typically the industry's strongest quarter.
Although Bank of America won't be affected by these trends as severely as Goldman Sachs or Morgan Stanley, it certainly won't escape unscathed. Its global markets unit, in particular, is likely to experience a notable decline, as it houses Bank of America's trading operations. This is the bank's fourth largest operating segment, accounting for 18% of its net revenue.
3. Efficiency ratio
Last but not least is Bank of America's efficiency ratio. This measures the percentage of net revenue that a bank spends on operating costs. The goal for a bank like Bank of America is to spend no more than 60% of its top line on expenses, reserving the remainder to cover taxes, build book value, and distribute to shareholders.
Bank of America has focused intensely on expense control since the crisis. It achieved its goal of cutting more than $8 billion in annual expenses under its Project BAC initiative. It's dramatically scaled back its branch count. And it's reduced the size of its staff by roughly 25%.
But it still has progress to make. Its efficiency ratio last year was 69%. That was an improvement over 2014, when its efficiency ratio was 88%. However, there is still considerable room for improvement, which can be accomplished by either raising revenue or continuing to cut costs.
In sum, with each passing quarter, Bank of America continues to put more distance between itself and the financial crisis. Improvement in its return on assets and efficiency ratio in particular will offer insight into whether the $2.1 trillion bank is still on track.
John Maxfield owns shares of Bank of America and Goldman Sachs. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.