Bank Earnings Being Driven by Deposits Not Trading

Bank of America (BAC) stock is up more than 3% today after the company issued a strong first-quarter earnings report. Investors seem to be optimistic the nation’s second-largest bank is putting two years of pandemic doldrums in the rearview mirror.

BAC reported revenue of $23.2 billion on earnings of 80 cents per share. Both numbers beat analysts’ expectations of $23.1 billion and 75 cents per share.

One possible negative in the earnings report was that net income for the quarter was $7.1 billion, which was 12% less than the same quarter of 2021. But it was still better than the nation’s largest bank, JPMorgan Chase (JPM), which saw a 42% drop in income from a year ago. Wells Fargo & Co. (WFC) also reported a 21% year-over-year drop in income when it reported earnings last week.

“Our strong first quarter client activity drove results that allow us to deliver for shareholders while continuing to invest in our people, businesses, and communities,” CEO Brian Moynihan said.

The bank reported that average deposits were up 13% from a year ago to $2 trillion. Balances increased 8% to $70 billion to $978 billion. And loans, excluding Paycheck Protection Program, grew to $89 billion.

And there are indications that the Charlotte, North Carolina-based bank will maintain that momentum into 2022, said CFO Alastair Borthwick. “Net interest income increased by $1.4 billion versus the year-ago quarter supported by strong loan and deposit growth,” he said. “Going forward, and with the forward curve expectation of rising interest rates, we anticipate realizing more of the benefit of our deposit franchise.”

In a research note, Citi analyst Mike Mayo noted that the company’s credit operations were close to a record low, which helped it beat analyst expectations for the first quarter.

“The BAC story is about Main St. banking (strong) vs. Wall St. banking (weak),” he wrote.

The bank projected revenue for the second quarter to be $23.42 billion, with earnings of 83 cents per share.

The Covid-19 pandemic wreaked havoc on much of the economy. People were out of work or required to work from home. Pandemic restrictions forced people to stay out of brick-and-mortar institutions, including banks. It was the biggest shakeup of the economy since the 2008-09 Great Recession.

For banks, there was another wrinkle. Pandemic stimulus checks and increased unemployment benefits flooded consumers with cash. And while that was great for ecommerce stocks like Shopify and Amazon, bank stocks suffered because people didn’t need to borrow.

Those stimulus checks are just a footnote now, and aside from student loan forbearance programs, lending activity is starting to tick up again.

The question now is if BAC stock can maintain its current momentum. Even with the gains from early today, Bank of America saw its stock drop by more than 12% so far in 2022. In the trailing year, however, BAC stock is nearly flat.

Rising interest rates also have the potential to push bank stocks like Bank of America higher. The Federal Reserve is raising rates this year to combat inflation that hit 8.4% in March. Increasing interest rates is a strategy to make borrowing money more expensive. The idea is that with less spending, prices will begin to drop.

Interest rates have a direct impact on bank loans because the higher rates increases the net interest margin, or the difference between the interest that banks earn on assets and the interest they pay to depositors and creditors. In short, rising interest rates mean that banks will make more profit on each loan.

Bank of America’s earnings report today continued a mixed season for bank stocks this month.

JPMorgan posted earnings of $30.72 billion, which beat analysts’ expectations of $30.4 billion. But the bank missed expectations on earnings by bringing in only $2.63 per share when analysts had expected $2.71 per share.

Wells Fargo had the opposite report – it missed analysts’ expectations on revenue by posting $17.59 billion while analysts had expected $17.82 billion. But it beat expectations on earnings per share with 88 cents while analysts had expected 81 cents per share.

The other major big bank, Citigroup (C), beat on both earnings and revenue. Citigroup posted $19.19 billion in revenue and $2.02 EPS, while analyst had expected $18.12 billion in revenue and $1.41 EPS.

As of this writing, Patrick Sanders did not have a position in any of the aforementioned securities.