Bank of America Corp. (BAC), the second-largest U.S. bank by consolidated assets, is likely to report that Q3 FY 2022 profit declined modestly on a year-over-year (YOY) basis, even as interest income increased, due in part to mounting provisions for credit losses.

Bank of America probably will say earnings per share (EPS) dropped by 8.7% to 78 cents, while revenue grew by a modest 3.3% to $23.5 billion, according to an average estimate from Visible Alpha. The company reports earnings on the morning of Oct. 17.

Major financial institutions such as Bank of America face challenges as markets sag, mergers slow and the Federal Reserve hikes interest rates to fight inflation. While Bank of America’s net interest income rose in the second quarter thanks to those higher rates, a significant boost in provision for credit losses eroded profit. Chief Executive Officer (CEO) Brian Moynihan said on Oct. 12 that U.S. consumers remain in good financial health despite accelerating inflation, suggesting the lender could rebound from the pandemic in spite of a slowing economy.

The company is also likely to say its net interest margin climbed to a two-year high, although it’s still far from pre-pandemic levels. Investors look to Bank of America’s net interest margin because it’s a key banking industry metric that shows the difference between interest banks earn on their assets and the interest they pay to depositors and creditors.

Bank of America shares spiked in August before dropping sharply in September 2022. This is part of a larger downward trend that began in February of this year. Overall, Bank of America stock fell 29.9% in the 12 months through Oct. 12, compared with a drop of 17.8% for the S&P 500.

Bank of America Earnings History

Bank of America’s profit has wavered over the past several years. The company posted four consecutive quarters of YOY EPS declines in FY 2020 as the pandemic unfolded. Then each quarter of FY 2021 showed a YOY improvement. Now, the first two quarters of FY 2022 have returned to YOY drops in EPS.

The firm’s revenue performance has been similarly erratic. Revenue declined YOY for five consecutive quarters starting in Q4 FY 2019 and then again for Q2 FY 2021. Although five of the last six quarters have posted YOY revenue growth, several of them have experienced anemic gains.

^{Source: Visible Alpha}

The Key Metric

Bank of America’s net interest margin measures the gap between the income banks generate from credit products such as 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 to remain competitive but they are reluctant to push rates they pay to creditors below the lower zero bound, or zero nominal interest rate. Note that Bank of America refers to net interest margin as “net yield on interest-earning assets” in its financial materials.

Net interest margin could provide investors with an especially helpful view of Bank of America’s financial well-being at this stage of its recovery. The bank’s net interest margin—already declining modestly from Q4 FY 2018—fell in FY 2020 and early FY 2021 while the Fed lowered interest rates amid the COVID-19 pandemic. Rate hikes in recent months have begun to improve Bank of America’s net interest margin.

Bank of America’s net interest margin hovered between 2.33% and 2.52% from Q1 FY 2018 through Q1 FY 2020. It fell to 1.87% for Q2 FY 2020 and continued to drop over subsequent quarters, reaching as low as 1.61% by Q2 FY 2021. Since that time it has improved without yet recovering all of the lost ground. Net interest margin reached as high as 1.86% for Q2 FY 2022. Analysts now predict net interest margin of 2.00% for Q3, the highest level in 10 quarters.