Are Bank Of America's Earnings As Bad As They Seem?

Bank of America Corp BAC reported earnings this morning, January 15 that fell $2 billion short of consensus revenue expectations, and shareholders are paying for it. The stock is down 3.3 percent today and nearly 13.5 percent in the first two weeks of 2015. Clearly the company had a bad quarter, but are the underlying numbers as bad as the headlines imply?

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Return On Equity

Earnings per share and revenue get the headlines during earnings season, but return on equity (ROE) is one of the best measures of a bank’s performance. ROE is an indication of how efficiently a company is generating profits from equity. Below is a 10-year chart of Bank of America’s ROE.

Clearly, in the glory days back before the financial crisis, Bank of America consistently had ROEs in the double digits. However, the modern environment is a whole new world. Since 2009, the company’s ROE has typically fluctuated between two percent and five percent.

In its earnings report released today, Bank of America disclosed a 4.8 percent ROE for 4Q14, which is a fairly typical post-crisis number. However, the overall ROE of 1.7 for 2014 is extremely disappointing for shareholders.

Net Interest Margin

Another number that is a good measure of a bank’s performance is the net interest margin (NIM). NIM is calculated by subtracting the interest a bank pays on its deposits and debt from the interest it earns on its loans and securities. That difference is then divided by the value of the loans and securities to produce the NIM.

Typically, a good NIM for a bank is 3-4 percent, but the higher the better. Not only did Bank of America once again fall short of the three percent level, it reported its lowest NIM ever in Q4 at 2.18 percent.

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Outlook

It’s likely that Bank of America is not the only bank that will continue to struggle in the current environment of record-low interest rates and post-crisis regulation. For now, Bank of America shareholders are left hoping that the banking giant can figure out a way to adapt and deliver better numbers in the future.

 

Disclosure: the author owns shares of Bank of America.