Bank of America. Picture: REUTERS
Bank of America. Picture: REUTERS

New York — Bank of America (BofA) posted the biggest jump in investment-banking fees on Wall Street, helping profit overcome headwinds from lower interest rates.

BofA stock jumped as much as 3.3% on Wednesday on the results, to the highest since August 1.  They have gained 21% in 2019 through to the end of Tuesday, compared to a 17% increase for the KBW Bank Index.

Third-quarter debt underwriting fees unexpectedly surged 19% and the firm’s traders boosted revenue, pushing profit above analysts’ estimates. Its gains in advisory fees also surpassed rivals in the best quarter for the investment-banking unit in more than two years.

The 27% increase in fees shows progress by the new corporate and investment-banking chief, Matthew Koder, who is  overhauling the unit after executives admitted in 2018 they had pulled back too much on risk. Koder is reinvigorated efforts to clinch more midsize transactions in the US and has been adding dozens of bankers across the division.

“We have, over the past four or five quarters, boosted the intensity in that business,” CFO Paul Donofrio said on a call with journalists. The US lender has encouraged staff in its commercial and wealth-management units to cooperate on bringing in more business, and “we’re seeing some results — we’re seeing the number of deals in our pipeline go up”, Donofrio said.

The BofA had “remained disciplined in managing expenses and responsible in our approach to underwriting, which led to continued low costs and strong asset quality”, Donofrio said.

CEO Brian Moynihan has expressed confidence in the US economy even as the Federal Reserve cuts interest rates and growth estimates are revised down.

“In a moderately growing economy, we focused on driving those things that are controllable,”  Moynihan said.

Lower borrowing costs are a major headwind for banks, while concerns about a global economic slowdown and trade tensions stymie client activity.

In the consumer division, net income climbed 5.3% to $3.3bn as loan and deposit growth drove net interest income higher. Wealth-management profit rose 8.3% to $1.1bn.

Impairment charge

The bank broke its four-quarter streak of record profit as it took a $2.1bn  impairment charge tied to the end of its payments joint venture with First Data Corporation. Its 18-quarter streak of positive operating leverage also came to an end.

JPMorgan Chase  on Tuesday posted a surprise jump in revenue from investment banking, as well as the biggest increase in fixed-income trading revenue in almost three years. But Goldman Sachs reported a bigger drop in investment-banking fees than analysts had predicted, down 15% from 2018’s third quarter.

BofA’s net interest income — revenue from customers’ loan payments minus what the company pays depositors — rose 1% to $12.3bn in the third quarter, matching the average estimate in a Bloomberg survey.

Other banks with stock rallies after better-than-expected earnings included BNY Mellon, up 3%; PNC Financial Services Group, 1.7%, and US Bancorp, which gained as much as 3.2%. Meanwhile, big banks that had post-earnings gains on Tuesday slipped with Wells Fargo dropping 0.3% and Citigroup falling 1.3%. JPMorgan Chase pared earlier losses to trade 0.2% higher on the day.

What analysts said:

Evercore ISI, Glenn Schorr

BofA beat on earnings “like a boss”, Schorr wrote in a note. He cited solid core loan and deposit growth, strong investment banking, better card trends, flat core expenses and “even better” credit trends.

“Issues in the quarter mainly centred on balance-sheet related dynamics,” he said. The bank may discuss on the call why asset sensitivity increased and what to expect from further rate cuts, he said.

Credit Suisse, Susan Roth Katzke

BofA’s EPS beat was due to “better revenue generation and lower-than-forecast credit costs”, along with a 3c benefit from a lower-than-expected tax rate, Katzke wrote.

She flagged 6% year-over-year average business unit loan growth; beats in FICC and equities trading and investment banking; and positive wealth management net flows. Credit costs were also lower than forecast, with a lower net charge off rate. “All eyes” were on net interest income, which beat with less net interest margin compression, she said.

Wolfe Research, Steven Chubak

Key highlights included net interest income, investment banking, trading, credit and costs — “basically everything”, Chubak said.

He expected shares to outperform, with a higher net interest income “jump off” and positive expense surprise likely to trigger upward revisions to estimates.

Bloomberg, Alison Williams

The “trading bar” for Morgan Stanley, which is due to report on Thursday, was raised as BofA joined a “sweep of beats”, analyst Alison Williams wrote.

“Morgan Stanley’s trading is a focus with 3Q results, with declines expected for equities and fixed-income trading revenue versus 3Q18. Its year-ago quarter generally fared better than the peer aggregate, and consensus expectations for the bank to modestly underperform barely changed overall trading across global peers this quarter.

“The largest US competitors have broadly exceeded expectations, with a sweep of FICC beats, and aggregate equities close to in-line. BofA and Goldman bested equities estimates, while JPMorgan missed and Citi was close to in-line. Morgan Stanley is relatively more equities focused, with its overall revenue from trading share second only to Goldman Sachs.”

Bloomberg