ANALYZING THE FINANCIAL PERFORMANCE OF BANK OF AMERICA WITH THE HELP OF FEW RATIOS

 

It is important for an investor to analyze the financial performance of an organization as it provides a snapshot of firm’s health and provides insight into future. Financial performance can be assessed with the help of key performance indicators such as Gross profit margin, net profit margin, etc. Results of such analysis can help the investor to take decision whether or not to invest in the firm.

Banks have unique characteristics from other firms. Hence, it is more practical to assess the financial performance of banks based on below mentioned indicators (Blokhin, 2023). 

• Efficiency ratio
• Price to earnings ratio
• Loan to deposit ratio

   Let us analyze the financial performance of BOA from 2019 to 2022 based on the above indicators.

1.       Efficiency Ratio

Expense and Income figures (Annual reports & proxy statements)

	2019 (In million)	2020 (In million)	2021 (In million)	2022 (In million)
Non-Interest expense	54900	55213	59731	61438
Income tax expense	5324	1101	1998	3441
Total	60224	56314	61729	64879
Net Interest income	48891	43360	42934	52462
Noninterest income	42353	42168	46179	42488
Total	91244	85528	89113	94950

• Efficiency ratio is calculated by dividing bank’s expense (Excluding interest expense) by total revenue.
• A lower ratio signifies that the bank is operating well. From the above graph, it can be noted that the efficiency ratio for Bank of America has increased from 2019, which indicates that bank’s expense are increasing in comparison to the revenue or revenue is decreasing in comparison to its expense.
• This is because there has been a reduction (Check above table) in Total income in 2020 by 6% and even though the Total revenue has increased by 4% in 2021, non-interest expense increased by 8.18% in the same year. However, bank have been able to control their expense to a certain extent by 2022 as we can notice that there has been a decline in efficiency ratio by 2%.

2. Price/ Earnings Ratio (P/E ratio)

• PE ratio is defined as market price divided by Earnings per share. This ratio shows the picture of market value of stock compared to the company’s earnings.
• From the above graph, it is understood that P/E ratio of bank increased from 12.7 to 16.12 in 2020 and gradually reduced to 12.4 in 2021. This imply the bank experienced higher growth in 2020 when restrictions were in place following the pandemic and reinstated in 2021 when the restrictions were lifted from the economy. Price/Earning ratio continue to fall even in 2022
• It is also to be noted that P/E ratio shall vary depending on whether the bank is aggressive or conservative in its loss provision policy. Banks which are conservative in their loss provision tend to have a higher P/E ratio and vice-versa.

3. Loan to Deposit ratio

     Total Loans and Deposits (Annual reports & proxy statements)

	2019 (In million)	2020 (In million)	2021 (In million)	2022 (In million)
Total Loans and leases	983426	927861	979124	1,045,747
Total Deposits	1434803	1795480	2064446	1,930,341

• This indicator helps us to understand the liquidity position of the bank. It is calculated by dividing the Total Loans of the bank by Total deposits. (Murphy, 2023)
• If the ratio is too high, it may indicate that the bank is susceptible to bank run as it may not have enough deposits to pay off the loan. Above graph indicates a decreasing trend for the loan to deposit ratio of the bank from 2019 to 2021 and an increase in ratio by 2022
• A decreasing trend  is a positive sign that the deposits with the bank are increasing year on year which allows bank to lend more and earn more interest. However, it also indicates that bank is not meeting its earning potential. This is because even though the Total deposits available with the bank increased by 25% in 2020, Total loans and leases reduced by 5% in 2020. Similar was the situation in 2021, where even though the amount of deposits increased significantly, percentage of the deposits utilized for loan was only 5%. Situation has changed in 2022 as the loan- to deposit ratio has increased by 6.75% implying that a greater percentage of deposits are utilized for loan to customers.
• Ideal loan to deposit ratio for banks is between 80% to 90%

REFERENCES

 

·         Blokhin, A. (2023) Useful metrics for evaluating bank stocks, Investopedia. Investopedia. Available at: https://www.investopedia.com/ask/answers/042815/what-metrics-can-be-used-evaluate-companies-banking-sector.asp#:~:text=Because%20banks%20have%20unique%20attributes,deposit%20ratio%2C%20and%20capital%20ratios.

·         Murphy, C.B. (2023) How the loan-to-deposit ratio (LDR) measures a bank's liquidity, Investopedia. Investopedia. Available at: https://www.investopedia.com/terms/l/loan-to-deposit-ratio.asp#:~:text=an%20Ideal%20LDR%3F-,Typically%2C%20the%20ideal%20loan%2Dto%2Ddeposit%20ratio%20is%2080,for%20expected%20or%20unexpected%20contingencies.

·         NA (no date) Annual reports & proxy statements, Bank of America Corporation. Available at: https://investor.bankofamerica.com/annual-reports-and-proxy-statements.