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14 October 2020

Bank of America's inevitable profit drop beats estimates

The US banking sector overall has been an industry struggling to recover in terms of valuations since the initial spread of the Coronavirus. Major concerns within the sector are related to bad debt provisions, with falling incomes and increased unemployment increasing the likelihood of borrowers defaulting on their loans. Many Wall Street banks are releasing earnings this week, including Citi, JPM and Blackrock this week and Wells Fargo, Bank of America and Goldman Sachs announcing yesterday (14th October 2020).

Bank of America yesterday announced a disappointing but inevitable drop in Q3 2020 profits compared to the same period last year. However, this is not an entirely negative indication of the Group’s performance considering that they beat analyst estimates. Analysts expected the firm to earn US$0.49 per share, when in fact earnings came in at US$0.51 per share, equating to US$4.44bn in earnings.

JP Morgan and Citi announced earnings this week that both showed solid performance that beat estimates yet, confusingly, share prices fell 1.65% and 4.90%, respectively. Analysts have pointed the finger at the US stimulus talks which have ground to a halt.

Banks such as JP Morgan and Bank of America are affected strongly by the outcomes of stimulus given their increased bad debt provisions, and large lending arms of their business models. Banks such as Goldman Sachs and Morgan Stanley have next to zero public lending exposure. Bank of America has over US$20bn in provision for bad loans, over double last year’s total, which could go a long way in explaining its lower earnings, adding US$5bn to those provisions in Q3 2020.

To summarise, many of the banks have performed well, Bank of America included, by outperforming analyst estimates. However, the true momentum driver for the share prices in the banking sector at present is centred around further stimulus from the White House, as well as interest rates from the Federal Reserve, both of which look likely to remain - stimulus for months and interest rates for years.
 
Bank of America's inevitable profit drop beats estimates
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