Bank of America profits hurt by lower interest rates
The bank is especially vulnerable to rate movements and expects the downward trend for its profits to continue in 2020
Bengaluru — Bank of America (BOA) got stung by lower interest rates in the fourth quarter, sending its profit down 4%, a trend that management expects to continue this year.
The North Carolina-based lender is especially vulnerable to rate movements because of the composition of its balance sheet. As the US Federal Reserve cut rates three times in 2019, analysts predicted BOA’s earnings would suffer.
The bank blunted the impact last quarter by growing loans at a rapid clip, and managed to beat Wall Street’s quarterly forecasts. But its shares fell 2% in morning trading after CFO Paul Donofrio said net interest income will decline throughout the first six months of 2020.
Donofrio expects to improve that metric later in 2020 by growing loans and reducing interest rates on deposits, but predicted BOA’s net interest income will be “modestly” lower for the full year.
Overall, the bank’s profit fell to $6.75bn from $7.04bn a year earlier. Excluding special items, the bank earned 75c per share, beating the average analyst estimate of 68c, according to Refinitiv. Revenue fell slightly to $22.35bn.
Analysts gave BOA credit for the way it has handled lower rates, with Wolfe Research’s Steven Chubak calling its performance “impressive” and Oppenheimer’s Chris Kotowski saying in a note to clients that interest income “held up very well. ... The rate environment definitely has an impact, but it isn’t insurmountable”.
The bank’s results were also helped by bond trading, which saw revenue rise 25% to $1.8bn.
The bond-trading business performed well across Wall Street, with JPMorgan Chase, Citigroup and Goldman Sachs Group reporting even bigger revenue jumps. The increase was largely due to easy comparisons with the same quarter a year ago.
Trading is a small part of BOA’s income statement compared with consumer banking, its biggest business. Revenue there fell 5% to $9.5bn, largely due to lower rates.
The bank’s net interest margin, which measures how profitably a bank can lend out depositors’ funds, fell to 2.35% from 2.52% a year earlier, and from 2.41% in the prior quarter.
Still, BOA managed to grow loans 6%, far outpacing increases at Citigroup and JPMorgan Chase. Its deposits grew 5%.