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Bank of America Corp. (BAC) has staged a sharp recovery from the pandemic. In 2021, it posted triple-digit earnings growth in the first half of the year and double-digit growth in the second. But the bank’s pandemic rebound faces headwinds and could end quickly. While interest rate hikes by the Federal Reserve this year will bolster Bank of America’s net interest margin, the economy risks slipping back into a recession if the Fed tightens too hard, too fast.
Investors will be watching to see if Bank of America can maintain the strong financial performance last year when it reports earnings on April 18, 2022 for Q1 FY 2022. Analysts are not optimistic. They expect the bank’s earnings per share (EPS) to decline for the first time since the final quarter of FY 2020 as revenue rises at a sluggish pace.
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 rise modestly on both a YOY and sequential basis.
Bank of America's financial performance may depend on actions by the Federal Reserve. Rising inflation has prompted the Fed to act faster than originally expected in raising interest rates. Last month, the Fed hiked its key interest rate for the first time since 2018. Fed officials also laid out an aggressive rate hike schedule that could see interest rates rise significantly higher by the end of the year. Since then, the Fed has indicated that it may be even more aggressive with rate hikes.
While rate hikes would help to boost Bank of America’s net interest margin, many economists believe that the Fed’s rate hikes combined with all the disruptions in global supply chains could tip the economy back into recession. The risk of a downturn, they believe, is definitely rising. Even the yield curve inverted briefly this month, with the yield on two-year Treasurys moving above the yield on ten-year Treasurys. The two-year yield has since moved back below the ten-year yield, but inversions of this kind have occurred before every U.S. recession.
The yield curve is normally upward sloping since in normal times investors need the incentive of higher yields to lend money for longer periods of time. It inverts when investors fear that the Fed will be forced to lower rates in the future to fight off a recession, and so they buy up the long end of the curve to lock in current interest rates before they fall. The increased demand pushes up prices, which simultaneously pushes down yields. That dynamic, combined with the Fed's rate hikes at the short end of the curve, causes the inversion.
The yield curve is not a perfect predictor of recessions—it sometimes inverts and is not followed by a recession. However, if a recession does occur, it would hurt Bank of America's lending activity and many of its other businesses.
Bank of America's shares have underperformed the broader market over the past year. The stock has been extremely volatile and has oscillated between outperformance and underperformance throughout the year. But it is currently underperforming. Shares of Bank of America have provided a total return of 0.6% over the past year, below the S&P 500's total return of 6.2%.
Bank of America reported Q4 FY 2021 earnings that beat consensus estimates while revenue matched expectations. EPS rose 37.6% compared to the year-ago quarter, marking the fourth straight quarter of rising earnings after four consecutive quarters of declines through FY 2020. Revenue grew 9.8% year over year (YOY), the second straight quarter of revenue growth. The bank said that its loans and deposits grew significantly, enabling the bank to increase its net interest income by $1.2 billion compared to the year-ago quarter.
In Q3 FY 2021, Bank of America’s earnings and revenue beat analysts’ expectations. EPS increased 69.0% YOY, marking the third straight quarter of expansion. However, the rate of growth slowed from the previous quarter’s rapid pace of 174.0%. Revenue grew 12.0% compared to the year-ago quarter, a sharp improvement from the decline of 3.9% in the previous quarter. The bank said that loan balances increased for the second straight quarter, helping to boost net interest income despite interest rates remaining low.
Analysts expect a weakening of Bank of America's financial performance in Q1 FY 2022. EPS is expected to fall 13.7% compared to the year-ago quarter, which would be the first decline since the final quarter of FY 2020. Revenue is expected to grow at a lackluster pace of 1.3% YOY. For full-year FY 2022, analysts are currently forecasting EPS to decline 7.9%, which would be the first decline since FY 2020. Annual revenue is expected to grow 5.5%, which would be the fastest pace in at least five years.

^{Source: Visible Alpha}

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. The Fed’s rate hikes this year should help to boost the bank’s net interest margin. However, if the Fed is forced to lower rates again to fight a recession, the net interest margin would also be squeezed again.
Bank of America's annual net interest margin in FY 2018 and FY 2019 was 2.46% and 2.43%, respectively. 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. It then fell back to 1.67% in the final quarter of FY 2021. Analysts expect it to rise to 1.70% in Q1 FY 2022, its highest level since the final quarter of FY 2020. For full-year FY 2022, analysts are currently forecasting Bank of America's net interest margin to rise to 1.81%. That would be above its level in FY 2021, but still below FY 2020 and dramatically below FY 2019 and FY 2018.

The Wall Street Journal. "U.S. Banks’ Pandemic Hot Streak Is Coming to an End."
Bank of America Corp. "Bank of America to Report First-Quarter 2022 Financial Results on April 18."
Visible Alpha. "Financial Data."
Reuters. "Fed hikes interest rates, signals aggressive fight to curb inflation."
Bloomberg. "Fed Pivots Toward Jumbo Hikes After Being Slammed as Too Slow."
The Wall Street Journal. "Recession Risk Is Rising, Economists Say."
The Wall Street Journal. "Economists Seek Recession Clues in the Yield Curve."
Board of Governors of the Federal Reserve System. "Selected Interest Rates (Daily) – H.15."
The Wall Street Journal. "Yield Curve Almost Flashes Recession, Maybe, but Who Knows When."
Bank of America Corp. "4Q21 Earnings Press Release," Page 2.
Bank of America Corp. "3Q21 Earnings Press Release," Page 1.
Earnings Reports and News
Earnings Reports and News
Earnings Reports and News
Earnings Reports and News
Earnings Reports and News
Earnings Reports and News
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