Business context and reporting period
Bank of America Corporation filed this Form 10-Q for the quarter and six months ended June 30, 2020. The bank reported $2.742 trillion in assets and approximately 213,000 employees at quarter-end. Its four reportable segments are Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking and Global Markets.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue, net of interest expense | $22.326B | $23.084B | $45.093B | $46.088B |
| Net interest income | $10.848B | $12.189B | $22.978B | $24.564B |
| Provision for credit losses | $5.117B | $0.857B | $9.878B | $1.870B |
| Net income | $3.533B | $7.348B | $7.543B | $14.659B |
| Diluted earnings per share | $0.37 | $0.74 | $0.77 | $1.45 |
Q2 return on average assets was 0.53% versus 1.23%; return on average common equity was 5.44% versus 11.62%; and the efficiency ratio was 60.06% versus 57.48%. The fully taxable-equivalent net interest yield was 1.87%, down 57 basis points year over year. Net interest income fell with lower rates, partly offset by lower funding costs and balance growth.
Noninterest income rose 5% to $11.478B in Q2, helped by stronger investment-banking fees and market-making activity, and a $704M gain on mortgage-loan sales. Card income and service charges declined with lower spending, client activity and overdraft fees. Noninterest expense increased 1% to $13.410B, reflecting pandemic-related costs partly offset by savings.
At June 30, total assets were $2.742T, loans and leases $998.9B, deposits $1.719T, long-term debt $261.6B, and shareholders’ equity $265.6B. Assets increased $307.6B and deposits $283.9B from year-end, primarily from stimulus-related inflows, lower spending and clients seeking liquidity. Six-month cash flows were $16.0B provided by operations, $178.8B used in investing and $290.3B provided by financing; cash and cash equivalents ended at $289.3B.
Material changes and credit conditions
The principal year-over-year earnings deterioration was the increase in credit-loss provision associated with the weaker COVID-19 economic outlook. The allowance for credit losses reached $21.1B, up from $10.2B at year-end; this includes the reserve for unfunded commitments. The allowance for loan and lease losses was $19.4B, or 1.96% of loans excluding fair-value-option loans. Adoption of CECL added $3.3B to the allowance at January 1 and reduced retained earnings by $2.4B after tax and other effects.
Commercial nonperforming loans rose to $2.2B from $1.5B at year-end; reservable criticized commercial exposure increased to $26.0B from $11.5B. Management said consumer delinquencies and charge-offs had not yet shown a meaningful pandemic-related deterioration, citing deferrals and stimulus support, but warned credit quality could weaken later. Net charge-offs were $1.146B in Q2 versus $0.887B a year earlier.
Global Markets was a relative strength: segment net income increased to $1.896B from $1.047B, supported by higher fixed-income and equity trading and investment-banking activity. Consumer Banking net income fell to $71M from $3.290B; Global Banking net income declined to $726M from $1.926B; GWIM net income fell to $624M from $1.076B.
Outlook, risks and unusual items
- Management expected net interest income to decline modestly in Q3 2020 versus Q2, based on the June 30 forward curve and other assumptions. It projected an approximately 11% effective tax rate for the rest of 2020, excluding the U.K. tax change and other unusual items; absent tax credits, it estimated approximately 25%.
- A U.K. tax-rate change enacted July 22 was expected to produce an approximately $700M income-tax benefit in Q3 2020. This is a subsequent-period item, not Q2 earnings.
- COVID-19 duration, economic recovery, unemployment, borrower performance and effects of government support remained highly uncertain. As of July 23, consumer and small-business deferred balances were $28.5B and commercial deferred balances, excluding small business, were $7.7B. These modifications were not classified as troubled debt restructurings under applicable relief.
- The Federal Reserve’s preliminary stress capital buffer was 2.5% for October 2020–September 2021, subject to finalization. Banks were required to suspend most Q3 repurchases and limit dividends. Bank of America declared a $0.18 common dividend per share and planned to continue the repurchase suspension except for equity-award offsets.
- Average global liquidity sources were $796B; average consolidated high-quality liquid assets were $549B and the average liquidity coverage ratio was 121%. The bank said it could borrow $340B against identified eligible assets, subject to eligibility and regulatory constraints.
- Other notable risks include potential further credit losses, market and interest-rate volatility, litigation and regulatory matters, LIBOR transition, operational/cybersecurity risks, and possible impairment if economic assumptions worsen. Management recorded no goodwill or other intangible impairment at June 30. The estimated aggregate reasonably possible litigation and representations-and-warranties loss was $0–$1.6B above accrued liabilities, where estimable; actual outcomes may differ.
Important facts for investors to verify
- Whether subsequent quarters confirm the expected credit-loss trajectory, including performance after payment deferrals and stimulus measures expire.
- How deposit growth, low interest rates and the projected modest Q3 net-interest-income decline affect margins and earnings.
- Final stress capital buffer requirements, regulatory distribution limits and the sustainability of the $0.18 dividend.
- Whether liquidity, capital and funding metrics remain resilient as credit exposure and commercial criticized loans evolve.
- Progress and any material costs or revenue effects from the merchant-services joint venture transition effective July 1, 2020.
- Resolution and potential financial impact of litigation, representations-and-warranties claims and other contingencies.