Here’s why Bank of America stock price fell despite stellar Q1 results

Shares of Bank of America Corp (NYSE: BAC) are trading in a volatile manner today after the company reported its first-quarter earnings. 

Profit more than doubled in Q1 2021

Bank of America Corp reported that its profit more than doubled in Q1 as the bank deployed reserves to compensate for potential loan losses amid the coronavirus pandemic. BofA released $2.7 billion from its reserves and announced a $25 billion stock repurchase program, expecting a rapid economic recovery boosted by vaccination programs. 

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But the bank reported banking revenue dropped 12% to $8.1 billion in the quarter, while the net interest income plunged 16% to $10.2 billion during the same period.

“While low-interest rates continued to challenge revenue, credit costs improved and we believe that progress in the health crisis and the economy point to an accelerating recovery,” Brian Moynihan, BofA’s chairman and CEO, said in a statement.  

In 2020, the Federal Reserve introduced ultra-low interest rates to boost the economic recovery after taking a critical hit from the pandemic. However, such a monetary policy also hurts lenders including BofA, which capitalize on the difference between what they gain from loans and pay out on deposits.

Similarly, JPMorgan reported last week its loans and lease balances plunged across all of the bank’s divisions by 7% to $887 billion, affected by lower credit card balances and shortcomings in commercial loans.

Still, Bank of America officials said in January they believe the company could recover loan growth later this year after the demand for new loans faded amid the pandemic as customers were trying to save money and major companies turned to capital markets. 

Net income applicable to common shareholders climbed $0.86 per share to $7.56 billion, compared to $3.54 billion, or $0.40 per share, a year ago.

BofA’s results topped analysts’ profit estimates of $0.66.

The bank reported a 21% drop in pre-tax, pre-provision profit, which is considered the best measure of the lender’s performance this quarter, compared to JPMorgan which reported its first-quarter pre-provision profit was up 18%. Pre-provision profit in Wells Fargo & Co was down 13%.

Why did the shares fall?

Bank of America stock initially moved higher in pre-market Thursday before swinging to the red minutes before the open. Shares then plunged aggressively to currently trade 4% lower on the day. A plunge in the price action has stopped at $38.37, where the 200-DMA is located.

A move lower came after the benchmark 10-year Treasury yield fell below 1.60% to send shares of all major banks sharply lower.KBW Nasdaq Bank Index (BKX), which tracks the performance of 24 leading banks, fell over 2%.

In essence, higher Treasury yields are hurting growth stocks, including almost the entire tech sector, as these companies suffer given that the value of their future cash flows falls. On the other hand, banks are profiting from higher rates.

Summary

Bank of America reported Q1 earnings, saying its profit in the quarter more than doubled as the company unlocked reserves to compensate for potential loan losses after the coronavirus crisis.