Bank of America (BAC -0.19%) reported first-quarter earnings earlier this week, and there were several important things to note. Although the bank's results topped analyst expectations, its stock fell after its report.
Below, I'll dive into those metrics and why they could be important to keep an eye on.
1. Net interest income remains under pressure
Bank of America's net interest income (NII) fell 3% in the quarter to $14.2 billion on a fully taxable equivalent basis, down from $14.6 billion a year earlier. NII is the difference what the company earns on its loans compared to what it pays for deposits and other funds; it's the company's largest source of income.
The biggest culprit for this decline came from higher-cost deposits. Bank of America saw a 17% decline in its total non-interest-bearing deposits (essentially costless money), which fell to $521 billion. Meanwhile, interest-bearing deposits rose 10% to $1.39 trillion.
This shift is leading deposit costs to outpace the interest on the bank's loans. During the quarter, Bank of America saw its net interest yield fall from 2.85% a year ago to 2.5%, or from 2.2% to 1.99% for its core banking business, which excludes its global market segment.
Management indicated that it expects the second quarter to be the low point for NII and estimates it will come in at about $14 billion. However, that comes with the expectation that the Federal Reserve still plans to cut interest rates three times this year.
This is important, and it suggests that Bank of America could benefit from interest-rate cuts that would help the company reduce its deposit costs.
2. Credit quality is deteriorating
Another important detail to come out of Bank of America's first-quarter earnings report is that credit quality is starting to show some signs of deterioration. The bank saw its charge-offs increase from $807 million a year ago and $1.19 billion in Q4 to $1.5 billion this past quarter. Its net charge-off ratio -- the ratio of losses compared to the value of loans -- for the quarter was 0.58%, up from 0.45% in Q4 and 0.32% a year ago. Meanwhile, its provision for credit losses rose to $1.32 billion from $1.1 billion last quarter and $931 million a year ago.
The biggest areas of weakness are coming from credit cards and commercial real estate. Management, however, said most of the credit card delinquencies were in the later stages and it was seeing late-stage increases slow and early-stage delinquencies improve. As such, it expects credit card delinquencies to start to level out in the coming quarters.
Meanwhile, weakness on the commercial real estate side is largely coming from office loans. This is an area that could see continued pressure. About 24% of its commercial real estate lending portfolio is in office loans, and commercial real estate is just under 7% of total loans and leases.
Overall, Bank of America's credit quality should continue to be monitored.
Image source: Getty Images
3. Strength in wealth management
One area of strength for Bank of America was its businesses centered around wealth management and the stock market. Client balances in its wealth management business rose 13% to $3.97 trillion, helped by market gains and customer inflows. The company saw assets-under-management inflows of $25 billion in the quarter.
Meanwhile, equity trading revenue climbed 14% to $1.87 billion, led by strong derivatives trading. Investment banking fees climbed 35% to $1.6 billion.
The bull market coming out of the pandemic has been good for companies like Bank of America, but it's interesting to see the big inflows in its wealth management business and strong equity trading revenue in the first quarter. These businesses can be a bit cyclical, and fixed-income trading was strong throughout much of 2023 but fell this past quarter.
Looking ahead
Over the long term, as one of the leading banks in the country, Bank of America should be a solid investment. However, there are some potential headwinds in the near term.
Deteriorating credit quality is something to monitor and could foreshadow an eventual recession. Such a scenario would also likely hurt the bank's wealth management and trading arms, which have been strong.
The company should benefit if the Fed cuts rates, but if that comes as the economy starts to weaken, it may not help the stock in the near to medium term. Long-term investors should continue to hold this Warren Buffett favorite, even with the threat of a potential recession, while any drop in price could be a buying opportunity.
