Before the opening bell on July 16, Bank of America Corp. BAC reported its earnings results for the second quarter of 2020.
The major U.S. bank topped analyst expectations, but the stock dropped more than 2% after the news that it followed in the footsteps of peers JPMorgan JPM and Wells Fargo WFC by setting aside additional loan loss reserves in anticipation of a wave of bankruptcies and loan defaults from the economic downturn.
Overview of the quarter
During the quarter, Bank of America generated net income of $3.5 billion for earnings per share of 37 cents compared to EPS of 74 cents in the prior-year quarter. Revenue came in at $22.5 billion, a decline from $23.08 billion in the prior-year quarter. Analysts surveyed by Refinitiv had estimated EPS of 27 cents on revenue of $22 billion.
The year-over-year decline in revenue was driven by an 11% decline in interest income due to lower interest rates, partially offset by a record increase of 57% in the investment banking segment, which brought in a total of $2.2 billion in fees for the quarter. Excluding net debt valuation adjustments, sales and trading revenue in the global markets segment grew 32% to $4.4 billion.
Loans rose 8% in the consumer banking segment, 10% in the global wealth and investment management segment and 14% in the global banking segment. Consumer deposits were up 15% to $811 billion.
Preparing for losses?
In response to expected bankruptcies and loan defaults resulting from the economic downturn and ongoing pandemic crisis, the company made provisions for additional credit losses of $5.1 billion, mostly consisting $4 billion in loan loss reserves. This may seem like an alarming sign to investors at first glance, but it is less than half of what JPMorgan and Wells Fargo set aside this quarter, and it’s not because Bank of America is a smaller bank; in fact, as of the quarter’s end, it had approximately $2.7 trillion in assets.
This could indicate that Bank of America is not being cautious enough, but it could also indicate that according to its own internal assessments, it simply does not need as many loan loss provisions as its peers due to whatever reasons.
Outlook
Bank of America did not offer concrete earnings guidance for the next quarter or for full-year 2020. It still seems to be taking precautions for a weakening economy, though compared to many other top U.S. banks, it is setting aside fewer funds in reserve for loan losses when compared to its assets and deposits.
Chairman and CEO Brian Moynihan had the following to say:
"In the most tumultuous period since the Great Depression, we delivered for our clients, our employees, our communities and our shareholders. Strong capital markets results provided an important counterbalance to the COVID-19-related impacts on our Consumer business, and our industry-leading digital capabilities allowed us to support clients amid difficult working conditions.”
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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