Bank of America Corp (BofA) reported a 19% drop in second-quarter profit yesterday and set a new expense target as growth in businesses from lending to trading failed to offset the impact of persistently low interest rates.
Like other lenders, the Charlotte, NC-based bank has been struggling under the weight of low rates for years, but analysts say Bank of America is particularly sensitive to the issue because of how management has positioned its balance sheet.
Accounting oddities related to interest rates also dented the bank’s profit during the quarter.
On conference calls following the results, senior executives said the bank is doing all it can to offset the impact of low rates — including keeping a tight lid on costs.
Chief Executive Brian Moynihan announced a new expense target of $53bn for 2018.
That’s $3.3bn less than the bank’s total expenses over the past four quarters, and comes after BofA has spent years of working through a sweeping cost-cutting project dubbed “New BAC” and an ongoing efficiency initiative called “Simplify and Improve.”
“The question is, can we grow earnings without rates improving?” Moynihan said.”We believe we surely can.”
The bank’s shares rose 2% to $13.93 following its results.
Bank of America isn’t alone in its struggle to boost earnings without a lift from higher rates.
Its decline in profits, despite loan growth, mirrored that of rivals that have reported results lately, including JPMorgan Chase & Co, Wells Fargo & Co and Citigroup.
After keeping rates near-zero for seven years, the US Federal Reserve bumped its target slightly higher last December.
But optimism has faded that rates will continue moving upward in the near-term, especially after Britain’s shocking vote to leave the European Union.
BofA, the second-largest US bank by assets, reported a 12% decline in net interest income — a measurement of how much a bank can earn by lending and investing its deposits and other funds. The decline underscores how difficult it was to boost earnings in a low-rate environment.
The bank was also hurt by its choice some years ago of an accounting method known as FAS 91.
The method affects when it can report earnings from the ups and downs of interest rates, Chief Financial Officer Paul Donofrio said.
The method led Bank of America to adjust its income downward by $1bn during the quarter.
In the year-ago quarter, FAS 91 boosted Bank of America’s results.
Donofrio said he is considering whether to switch to another accounting method to avoid the earnings volatility it creates.
Separately, the bank also took a $200mn negative adjustment related to the value of its own debt.
Altogether the adjustments hurt earnings by 6 cents per share.
Overall, Bank of America’s net income attributable to BofA’s common shareholders fell to $3.87bn, or 36 cents per share, in the second quarter ended June 30, from $4.80bn, or 43 cents per share, a year earlier.
Excluding special items, the bank earned 37 cents per share, beating the average analyst estimate of 33 cents, according to Thomson Reuters I/B/E/S.
Its adjusted revenue of $20.8bn topped estimates of $20.4bn, according to Thomson Reuters I/B/E/S.
The bank’s ratio of expenses to revenue, excluding special items, was 62% in the second quarter, 2 percentage points better than the year-earlier period.
One of Bank of America’s biggest expenses in recent years has been those related to litigation and regulatory settlements.
Last quarter, it spent $270mn on legal issues, Moynihan said, adding that he expects legal costs to run about $300mn a quarter in the near term.
In reports immediately following Bank of America’s results, analysts said its underlying profit was reasonably strong, given the environment.
In a presentation, the bank said net income in each of its four key businesses grew, when stripping out the accounting adjustments and assets it is winding down.
Trading was particularly strong, as BofA handled high volumes following the vote in Britain, known as Brexit.
Adjusted trading revenue rose 12% to $3.7bn in the quarter.
Fixed income, currency and commodities trading revenue rose 22%.
“Bank of America’s 2Q results, while noisy, reflected a number of items that surprised positively,” said Nomura analyst Steven Chubak.
Up to Friday’s close of $13.66, Bank of America’s shares had fallen about 19% since the start of the year.
The KBW bank index fell 8% over the period.