B of A's Net Interest Income Under Heavy Pressure

Wide-moat rated Bank of America BAC reported third-quarter 2020 earnings that were essentially in line with S&P Market Intelligence consensus, with EPS coming in at $0.51, down year over year but up sequentially. The return on tangible common equity in the quarter was roughly 10%. Pre-provision revenue was down roughly 11% year over year, as net interest income came under increasing pressure, down 17%, and fees couldn’t quite offset the damage, down 4%. The bank has had some changes to the run rate of its “other income” line--removing this line, fee income was actually up 3%. In a similar fashion to peers, investment banking had another exceptional quarter of growth, although trading didn’t see quite the boost that some peers saw during the quarter. Management expects that the third quarter will be the bottom for net interest income, which seems reasonable to us. We also expect fee income to stabilize, as I-banking and trading fees retreat a bit while some of the payments and volumes related fees continue their recovery. Even so, we expect pre-provision revenue to be down roughly 6% for full-year results and that we could be down another percent or two in 2021 as the full run rate of lower net interest income plays out. Expenses are coming in a bit higher than might have been expected at the beginning of the year, due to a combination of factors: COVID-19-specific expenses, a change in accounting for merchant services, and a legal reserve. We would expect the COVID-19-specific expenses to begin to roll off throughout 2021, while the legal reserve was a one-time item. There is still a lot of uncertainty regarding the future economic outlook and future credit developments, but after updating our projections with the latest results, we are maintaining our fair value estimate of $28 per share.

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