Bank of America profit beats estimates as healthy economy fuels loan growth
New York — Bank of America beat estimates for quarterly profit on Wednesday, as the loan book of the US’s second-largest lender benefited from a healthy economy.
Consumer banking has held up for the big Wall Street banks that have reported second-quarter results this week, cushioning a blow from weakness in trading and advisory businesses.
But warning signs also emerged with JPMorgan, Citigroup and Well Fargo reporting a dip in margins, stoking fears that interest rate cuts could put further pressure on profit by narrowing the spread between what banks charge on loans and pay on deposits.
Bank of America, however, bucked that trend and reported a three basis-point increase on the year in its interest margin to 2.44% for the second quarter, though the metric fell seven points from the first quarter.
CFO Paul Donofrio said the sequential decline was due to lower long-term interest rates.
“When long-term interest rates fall, we see more people pay off their mortgages and that translates into more mortgage-backed securities being redeemed and that forces us to write off some premiums,” he said. “I don’t think you can extrapolate that into the future because long-term rates have stabilised at this point.”
The lender is the most sensitive of the big US banks to interest rate changes because of its large deposit stock and rate-sensitive mortgage securities.
In the absence of higher interest rates to help pad revenue, banks can improve margins by reducing expenses. Bank of America completed a years-long cost-cutting initiative in 2018, and has pledged to keep expenses flat through 2020.
Expenses during the quarter were up slightly as the bank invested more in its consumer, commercial and wealth management businesses.
Total loans in its consumer banking unit rose 6%, while deposits were up 3%, pushing income from the business up 13% to $3.3bn.
“We see solid consumer activity across the board, with spending by Bank of America consumers up 5% this quarter over the second quarter of last year,” CEO Brian Moynihan said.
Growth in the consumer business helped offset softness in market revenue and Wall Street businesses.
The retail bank and wealth management segments each recorded double-digit profit gains, while its commercial and markets businesses each saw profit and revenue decline from lower investment banking and trading fees.
Adjusted revenue from Bank of America’s global market business, which includes bond and equities trading, fell 5.7% to $4.18bn.
Net income applicable to common shareholders rose 10% to $7.11bn, or 74c per share, in the second quarter ended June 30. Excluding items, the bank earned 75c per share.
Revenue, net of interest expense, was up about 2% at $23.08bn.
Analysts had expected a profit of 71c per share on revenue of $23.2bn, according to IBES data from Refinitiv.