Bank of America Q4 FY2021 Earnings Report Preview: What to Look For

Bank of America Corp. (BAC) posted a sharp rebound in quarterly profits in 2021, driven by the bank's release of giant loan loss reserves built up earlier to cover potential defaults amid the shock caused by COVID-19. The rebound in revenue, however, has been much weaker because low interest rates make it harder to generate interest income. That's likely to change as the Federal Reserve is expected to raise interest rates at least three times in 2022.

Investors will be looking for further signs of Bank of America's financial rebound when the company reports earnings on Jan. 19, 2022 for Q4 FY 2021. Analysts expect the bank's earnings per share (EPS) to rise at a rapid pace year over year (YOY), but at a slower pace than in recent quarters. Revenue is also expected to rise compared to the year-ago quarter.

Investors also will focus on Bank of America's net interest margin, or what the bank calls "net interest yield." It is a key metric used in the banking industry that reflects the difference between the interest banks earn on their assets and the interest they pay out to depositors and other creditors. Analysts expect Bank of America's net interest margin to fall slightly on a YOY basis, but remain steady compared to the previous quarter.

Shares of Bank of America have outperformed the broader market over the past year. The stock had been lagging the market during the first month of the past year, but began to outperform by mid-February. It continued to outperform throughout the rest of the year, despite some volatile movements. Bank of America's shares have provided a total return of 45.5% over the past year, above the S&P 500's total return of 20.8%.

Bank of America Earnings History

Bank of America reported Q3 FY 2021 earnings that beat analysts' expectations. EPS rose a robust 69.0% compared to the year-ago quarter, slowing from the previous quarter's rapid pace. Revenue grew 12.0% YOY, a significant improvement from the previous quarter's decline and the fastest pace of growth in at least 19 quarters. The bank said that loan balances increased for the second straight quarter, helping to boost net interest income despite interest rates remaining low.

In Q2 FY 2021, Bank of America reported mixed results, with EPS beating consensus estimates while revenue missed. EPS rose 174.0% YOY, the fastest pace of growth since the final quarter of FY 2018. Revenue fell 3.9% compared to the year-ago quarter, marking the sixth quarter out of the past seven that the bank reported declining revenue. The bank noted that consumer spending had far surpassed pre-pandemic levels and that loan levels were beginning to grow.

Analysts expect both EPS and revenue to expand in Q4 FY 2021. EPS is expected to increase 29.0%, which is robust growth but still the slowest pace in the past four quarters. Revenue is expected to rise 9.8%, a slight deceleration from the previous quarter's pace. For full-year FY 2021, analysts expect EPS to increase 87.6%, which would be the fastest pace in at least the past five years. Annual revenue is expected to grow 4.2%. That would be the second-fastest pace in at least five years and a significant improvement from last year's decline of 6.3%.

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The Key Metric

As mentioned above, investors will also be focusing on Bank of America's net interest margin. This key metric measures the difference between the income banks generate from credit products like loans and mortgages and the interest they pay to depositors and other creditors. It is analogous to gross margin reported by non-financial companies, which is the difference between sales and cost of goods sold. In extremely low interest rate environments, net interest margins get squeezed as banks lower rates charged to borrowers in order to remain competitive but they are reluctant to push rates they pay to creditors below the lower zero bound. If the Fed raises rates this year as expected, Bank of America should see its net interest margin begin to widen.

Bank of America's annual net interest margin in the three years prior to FY 2020 fell within a range of 2.35%-2.43%. In FY 2020, it declined to 1.89% as the Federal Reserve lowered interest rates to ease credit amid the pandemic. The bank's net interest margin in the first quarter of FY 2020 was 2.33% and gradually decreased to 1.71% by the final quarter of the year.  It continued to fall in FY 2021, dropping to 1.68% in the first quarter and 1.61% in the second. However, it rebounded to 1.68% in the third quarter. For Q4 FY 2021, analysts expect Bank of America's net interest margin to stay steady at 1.68%, which would be dramatically below the bank's margins before the pandemic. For full-year FY 2021, analysts expect a net interest margin of 1.65%, which would be the lowest level in at least the past five years.