Bank of America’s Latest Earnings Unlikely to Rattle Investors

BAC stock - Bank of America’s Latest Earnings Unlikely to Rattle Investors

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Bank of America (NYSE:BAC) announces fourth-quarter earnings Jan. 16, before the markets open. Of the big banks reporting their final quarter of fiscal 2018, BAC is third out of the gate. Will the news be good or bad for BAC stock?

We’ll know soon enough. 

In the meantime, here are three things that investors should look for from BAC’s earnings report. 

Net Interest Margin

The best banks are good at playing both offense and defense. 

When it comes to offense, banks make a lot of money by lending out their deposits at rates above what they pay their depositors. The difference between the interest revenue earned and the interest expense on those loans is called the interest rate spread. The interest rate spread relative to the company’s earning assets is the net interest margin. 

As long as Bank of America’s net interest margin is moving in the right director, investors should be happy with its Q4 2018 result. 

In the third quarter, BAC reported a net interest margin of 2.42% — six basis points higher than a year earlier, four basis points higher than in the second quarter, and one basis-point higher than analysts’ expectations.

That said, Bank of America isn’t my favorite bank stock. 

I prefer niche banks like SVB Financial (NASDAQ:SIVB), which lends to entrepreneurs and innovators. It expects its net interest margin for fiscal 2018 to be as high as 3.65% — 34% higher than BAC.

However, as InvestorPlace’s Tom Taulli said in mid-December: Bank of America has the scale to make 2.42% more than plenty.  

When BAC reports Wednesday, anything above that should be seen as a positive for BAC stock.

Credit Losses and Loan Portfolio

Not only does Bank of America need a good offense, but it also requires a good defense, and that’s best exemplified by the quality of its loan portfolio and the ability to limit its exposure to loan losses. 

As the drums beat louder for a recession sometime in 2020, banks are quietly trimming the risk from their loan portfolios, as problems are emerging regarding home equity lines of credit and credit cards on the personal side of banking, and commercial real estate concerns on the business side of things.

We have been more cautious in the extension of credit, initial credit lines, the broad-based credit line increase programs,” said Capital One Financial (NYSE:COF) CEO Richard Fairbank at a December bank conference. “At this point in the cycle, we’re going to hold back on that option a bit.”

In the third quarter, Bank of America’s provision for credit losses was down by $118 million to $716 million, well below the analyst estimate of $964.2 million.

When you consider that Bank of America has a loan portfolio in its consumer banking business of $285 billion and net charge-offs of just 0.40%, the loans side of its business is doing just fine.

So, I’d look for three things from Bank of America’s Q4 2018 earnings when it comes to playing defense: net charge-off ratio, non-performing-assets ratio, and the allowance-for-loan-and-lease-losses ratio.

All three of them were down in September’s quarter from June’s second-quarter report. I’d expect all three of these to have either stayed the same or decreased a little in the fourth quarter.

Even if they did go up slightly, the economy is still strong enough that it likely won’t hurt BAC stock too much.

What About BAC Stock Earnings?

Analysts are expecting Bank of America to earn 63 cents in the fourth quarter, 16 cents higher than a year earlier. That’s down two cents from what analysts were projecting a month ago. The economic jitters we’ve faced in the last two months has made analysts slightly more cautious about the banking sector, generally, and Bank of America, specifically.

Right now, 15 analysts have a “buy” rating on BAC stock, six have an “overweight” rating and nine have a “hold” rating. 

As far as a 12-month target price, it’s currently $31.79, providing investors with 21% upside.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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