Source: PaxForex Premium Analytics Portal, Fundamental Insight

Earlier this week, Bank of America released its first-quarter earnings report, unveiling several notable points. Despite surpassing analyst expectations, the bank's stock experienced a decline following the report.

Let's delve into the key metrics and their potential significance:

• Net Interest Income Faces Pressure

Bank of America's net interest income (NII) witnessed a 3% decline in the quarter, totaling $14.2 billion on a fully taxable equivalent basis, down from $14.6 billion compared to the previous year. NII represents the variance between what the company earns from its loans and what it pays for deposits and other funds, constituting its primary income source.

The primary driver behind this decline was the increase in costs associated with deposits. The bank experienced a notable 17% decrease in total non-interest-bearing deposits, amounting to $521 billion. Conversely, interest-bearing deposits rose by 10% to $1.39 trillion.

This shift has led to deposit costs surpassing the interest earned on the bank's loans. Throughout the quarter, Bank of America observed a decline in its net interest yield, dropping from 2.85% a year ago to 2.5%, or from 2.2% to 1.99% for its core banking business, excluding its global market segment.

Management hinted that they anticipate the second quarter to mark the nadir for NII, estimating it to be around $14 billion. However, this projection is contingent on the Federal Reserve's plan to implement three interest rate cuts this year.

This is a crucial point to note, suggesting that Bank of America could potentially benefit from interest rate cuts, which would aid in reducing its deposit costs.

• Credit Quality Is Deteriorating

Bank of America's first-quarter earnings report reveals a concerning trend in credit quality. The bank experienced a notable increase in charge-offs, rising from $807 million a year ago and $1.19 billion in the previous quarter to $1.5 billion in the recent quarter. As a result, its net charge-off ratio, which compares losses to the value of loans, surged to 0.58% for the quarter, up from 0.45% in the previous quarter and 0.32% a year ago. Additionally, the provision for credit losses climbed to $1.32 billion from $1.1 billion in the previous quarter and $931 million a year ago.

The primary areas of weakness originate from credit cards and commercial real estate. Management highlighted that most of the credit card delinquencies were in advanced stages, with late-stage increases slowing down and early-stage delinquencies improving. Consequently, it anticipates credit card delinquencies to stabilize in the forthcoming quarters.

Meanwhile, commercial real estate exhibits weakness primarily in office loans, indicating potential sustained pressure in this segment. Approximately 24% of its commercial real estate lending portfolio comprises office loans, and commercial real estate constitutes nearly 7% of total loans and leases.

In conclusion, Bank of America's credit quality warrants ongoing monitoring to assess its trajectory.

• Strength in Wealth Management

Bank of America showcased robust performance in its wealth management and stock market-oriented businesses, marking a notable area of strength. Client balances in its wealth management division surged by 13% to reach $3.97 trillion, supported by market gains and inflows from customers. Additionally, the company recorded $25 billion in assets-under-management inflows during the quarter.

Equity trading revenue demonstrated a remarkable ascent, climbing by 14% to $1.87 billion, primarily driven by robust derivatives trading. Furthermore, investment banking fees soared by 35% to $1.6 billion.

The ongoing bull market, emerging post-pandemic, has been particularly favorable for Bank of America and similar entities. Notably, the significant inflows observed in its wealth management segment and the impressive equity trading revenue in the first quarter stand out. While these businesses can exhibit cyclical patterns - fixed-income trading notably thrived throughout much of 2023 but dipped in the recent quarter - Bank of America's prominent position in the banking sector suggests long-term stability.

However, there are potential near-term challenges to consider. The deteriorating credit quality warrants monitoring, as it could potentially signal an impending recession. Such a scenario could adversely affect the bank's wealth management and trading divisions, which have been performing strongly.

While the company stands to benefit from potential rate cuts by the Fed, the timing of such measures amid a weakening economy may not necessarily bolster the stock in the short to medium term. Nonetheless, long-term investors may find value in retaining this Warren Buffett favorite, despite the looming threat of a recession, with any price decline possibly presenting a buying opportunity.

As long as the price is above 34.00, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 35.74
• Take Profit 1: 38.00
• Take Profit 2: 40.00

Alternative scenario:

If the level of 34.00 is broken-down, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 34.00
• Take Profit 1: 32.00
• Take Profit 2: 30.00