Business context and reporting period
Bank of America Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2020, compared primarily with the first quarter of 2019. The diversified bank operates through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other. COVID-19 and related market disruption materially affected the quarter; the filing cautions that interim results are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q1 2020 | Q1 2019 or prior date |
|---|---|---|
| Revenue, net of interest expense | $22.8 billion | $23.0 billion |
| Net interest income | $12.1 billion | $12.4 billion |
| Provision for credit losses | $4.8 billion | $1.0 billion |
| Noninterest expense | $13.5 billion | $13.2 billion |
| Net income | $4.0 billion | $7.3 billion |
| Diluted earnings per share | $0.40 | $0.70 |
| Efficiency ratio | 59.19% | 57.48% |
| Return on average assets | 0.65% | 1.26% |
| Net interest yield, FTE basis | 2.33% | 2.51% |
At March 31, 2020, total assets were $2.62 trillion, loans and leases $1.05 trillion, deposits $1.58 trillion, long-term debt $256.7 billion, and total shareholders’ equity $264.9 billion. Assets rose $185.9 billion and deposits rose $148.5 billion from year-end, reflecting higher client deposits, commercial credit-line draws and mortgage growth. Long-term debt increased $15.9 billion from year-end.
Cash and cash equivalents ended at $250.4 billion, up $88.8 billion during the quarter. Cash flows were $19.0 billion provided by operating activities, $90.4 billion used in investing activities and $161.1 billion provided by financing activities; financing inflows included a $148.5 billion net increase in deposits. These bank cash-flow figures should not be interpreted like industrial-company free cash flow.
The allowance for credit losses was $17.1 billion at quarter-end, including $15.8 billion for loans and leases and $1.4 billion for unfunded commitments. Net charge-offs were $1.12 billion, versus $991 million a year earlier. Regulatory capital ratios included a 10.8% CET1 ratio under the Standardized approach; management said the Corporation met the definition of well capitalized. Average Global Liquidity Sources were $565 billion; average consolidated HQLA was $464 billion and average LCR was 115%.
Material changes versus comparable periods
- Net income fell 45%, primarily because provision for credit losses increased by $3.7 billion amid the COVID-19 economic outlook; lower revenue and higher expenses also contributed.
- Net interest income declined $245 million as lower rates more than offset loan and deposit growth. Noninterest income was essentially flat: higher investment and brokerage and investment banking fees were offset by weaker card income and other income, including fair-value losses.
- Credit costs increased sharply following adoption of CECL on January 1, 2020, which added $3.3 billion to the allowance at adoption, and further COVID-related reserve increases during the quarter. The adoption adjustment reduced retained earnings by $2.4 billion after tax and other effects.
- Commercial loans rose $67.2 billion during the quarter, mainly from clients drawing committed credit lines; approximately 90% of the draws were investment grade or collateralized. Commercial criticized utilized exposure increased $5.9 billion to $17.4 billion.
- Segment net income changed materially year over year: Consumer Banking $1.8 billion versus $3.2 billion; GWIM $866 million versus $1.0 billion; Global Banking $136 million versus $2.0 billion; Global Markets $1.7 billion versus $1.0 billion; and All Other net loss $492 million versus $36 million. Global Markets benefited from heightened client trading activity and volatility; Global Banking and Consumer Banking were especially affected by credit provisions.
Outlook, management commentary and risks
- Based on the forward interest-rate curve and other assumptions at March 31, management expected Q2 2020 net interest income of approximately $11 billion, with stabilization in the second half, assuming mid-single-digit year-over-year average loan and deposit growth. These are expectations, not guarantees.
- Management expected a full-year 2020 effective tax rate of approximately 14%–15%, absent unusual items.
- The company repurchased $6.4 billion of common stock in Q1, then suspended repurchases through the end of Q2 to preserve capacity to support customers and the economy. Repurchases to offset equity-compensation issuances were excluded from the suspension.
- COVID-19 risks include prolonged recession, unemployment, lower rates, weaker demand and asset-management fees, market volatility and reduced liquidity, operational disruption, and higher consumer and commercial credit losses. Energy and commodity-market stress, customer withdrawals or further credit-line draws, and possible ratings downgrades could also pressure liquidity and capital. The ultimate duration and impact were described as highly uncertain.
- As of April 27, 2020, the company reported completed COVID-related payment deferrals or forbearance on 4% of accounts and 4% of balances overall. These short-term relief modifications were not classified as troubled debt restructurings under the applicable guidance.
- The company temporarily elected a five-year regulatory-capital transition for CECL. At March 31, it reported no pandemic-related impairment of goodwill or other intangibles and no significant change in fair-value hierarchy classifications.
- For certain litigation and representations-and-warranties matters, management estimated an aggregate reasonably possible loss range of $0–$1.6 billion in excess of accrued liabilities, if any. The filing says outcomes and timing are difficult to predict and actual losses could differ materially.
- Other material risks include LIBOR and other benchmark-rate transition, regulatory capital and liquidity requirements, fair-value estimates, cyber and operational risks, and litigation or regulatory actions. The filing also notes the pandemic may complicate the industry’s transition from LIBOR.
Important facts for investors to verify
- Whether credit provisions, criticized exposures and net charge-offs continue to rise, and how CECL assumptions and economic forecasts change in later quarters.
- Whether commercial line draws convert to sustained borrowing, and how borrower payment deferrals affect subsequent delinquencies and losses.
- Whether Q2 net interest income and second-half stabilization track management’s assumptions, particularly given low rates and actual loan and deposit growth.
- Capital and liquidity trends, including CET1, LCR, deposit flows, debt issuance and maturities, and any decision to resume common-stock repurchases.
- COVID-related modification balances and program performance, plus developments in energy, commercial real estate and other exposed industries.
- Changes in litigation and representations-and-warranties exposures; the disclosed $0–$1.6 billion range is an estimate for certain matters, not maximum potential loss.