Bank of America (BAC  ) shares finished slightly higher following a mixed third-quarter earnings report. Revenue fell short of expectations, while earnings were slightly better than expected. However, in the conference call, CEO Brian Moynihan said that net interest income likely bottomed, and defaults weren't as bad as expected.

Inside the Numbers

In the third quarter, Bank of America generated $20.45 billion in revenue which came in slightly under analysts' expectations of $20.8 billion. Earnings fell by 16% compared to 2019's Q3 at $0.51 per share. However, this was better than expectations of $0.49 per share.

Net interest income came in at $10.2 billion which was a 20% drop from last year's $12.3 billion. However, one silver lining was the management's confidence that this item will improve in the coming quarters. Another important metric - net interest margin fell short of analysts'

Out of the big banks, Bank of America is one of the most sensitive to interest rate swings as it has a vast deposit base. So, the interest rate environment has been a major headwind. And, there's little sign of relief given that the Fed is committed to its low-rate policy for years and has mused about "yield curve control" which would flatten the long-end even more.

This is bad in two ways - it makes lending less profitable and it also incentivizes refinancing in which a bank basically swaps a more lucrative loan for a less lucrative loan. All banks have been negatively impacted but some of its competitors like JPMorgan (JPM  ) and Citi (C  ) are more global and have larger trading operations that cushion them during periods of low rates.

Another bright spot is that that it only set aside $1.4 billion in reserves for credit losses which was much less than $5.1 billion in the previous quarter and is also consistent with management's comments that the worst has passed.

Stock Price Outlook

Bank of America's stock opened lower by 1.5% but finished 1.5% higher following results. So far this year, the stock is down by 29%, while the S&P 500 is 7% higher. It's also about 25% below its pre-coronavirus highs.

Usually, early in economic recoveries, financial stocks outperform as expectations for economic growth are upgraded, leading to upwards pressure on long-term rates. This isn't really happening this time. Banks have been major laggards since October 2018, when rates started to trend lower. Despite a reversal in many economic indicators and asset prices, interest rates haven't started moving higher.

Until this happens, banks should be treated like trading vehicles rather than long-term investments.