Bank of America Beats Fourth-Quarter Earnings; Net Interest Income Outlook is Disappointing

Wide-moat-rated Bank of America BAC reported fourth-quarter earnings of $0.85 per share, ahead of the Factset consensus of $0.77 but below our own estimate of $0.92. The main difference between our estimates and Bank of America’s results was expenses, which came in 3% above our expectations. Management updated its net interest income, or NII, guide for the quarter several weeks ago, lowering its outlook by roughly $350 million. Provisioning was also slightly above our forecast.

NII sticks out to us, even though it technically wasn’t a miss based on updated guidance that was below the outlook just several months ago. Bank of America’s NII sensitivity has been a key driver of earnings growth, so getting a feel for sensitivity in 2023 is a key concern. Here, management provided few details, only giving a rough outlook for the first quarter of $14.4 billion, which is materially below our previous estimate of $15.1 billion. While we can appreciate the difficulty of making predictions in the current rate environment, Bank of America seems to be one of the only of its peers reluctant to give some full-year guard rails. Interest-bearing deposit costs of 96 basis points were not far off from our estimate of 94 basis points, although there has been a greater shift toward interest-bearing deposits, particularly as non-interest-bearing deposits fall. Given this updated outlook, we plan to lower our NII projections.

With expenses coming in a bit higher than we expected, and the outlook for 2023 remaining a bit vague, we think it is prudent to slightly raise our expense outlook for 2023. Based on these updates, we expect the most likely outcome will be to lower our fair value estimate of $39 by a dollar or two. We thought Bank of America was looking a bit pricey at the start of 2022, and even after the fall in shares in 2022, we still view the bank as close to fairly valued. Shares trade above the average price/fair value of our banking coverage.