By Rachel Louise Ensign
Bank of America Corp. said its first-quarter profit beat expectations as trading jumped and the lender started to see the benefits of a long-awaited rise in interest rates.
Some analysts and shareholders cheered the results as a sign the bank's turnaround plans are finally coming to fruition. But the recent reversal in U.S. Treasury yields threaten the expected benefits from higher interest rates.
Quarterly profit at the Charlotte, N.C.-based bank was $4.86 billion, up from $3.47 billion a year ago. Per-share earnings were 41 cents. Analysts had expected 35 cents a share.
Revenue was $22.25 billion, up from $20.79 billion a year ago. On an adjusted basis, revenue of $22.45 billion compared with analysts' expected figure of $21.61 billion. The results benefited from the comparison to a particularly weak quarter one year ago.
Shares slid 1.3% to $22.51 in midday trading.
After heavy loan losses during the financial crisis and debilitating legal fees in its wake, the bank has set out to reshape itself as a stable lender focused on responsible growth. Investors have recently cheered the approach: Through Monday, Bank of America shares had risen about 61% over the past year, among the best of the six largest U.S. banks, buoyed by the prospect of a stronger economy and an election result that led to optimism about regulatory and tax relief. For a period earlier this year, the stock traded above its book value for the first time since the financial crisis.
Some investorssaid the first-quarter results vindicated the strategy taken by Chief Executive Brian Moynihan, a lawyer who took the helm of the bank in 2010 as it struggled. "You're talking about a guy who everyone said, 'How is this lawyer going to turn this around?'" said Bank of America shareholder Bill Smead of Smead Capital Management "Here, this guy has done exactly what we would have wanted him to do."
The bank has been expected to get a bigger boost from rising interest rates than peers. Most consumer banks' lending businesses benefit from a Federal Reserve rate increase. But Bank of America's balance sheet -- full of deposits and mortgage securities -- is particularly well-positioned.
The lender's net interest income increased 7.4% to $11.058 billion during the quarter from the prior quarter, surpassing the lender's projection that the income metric would advance about $600 million.
But the bank warned that recent moves in interestrates could hamper future gains in net interest income. Banks generally earn more when rates rise. While the Federal Reserve raised a key short-term rate in March, the 10-year U.S. Treasury, an important long-term interest rate, has fallen in the first weeks of the second quarter and dropped further on Tuesday morning.
The gains in net-interest income will be "much more modest" next quarter, Chief Financial Officer Paul Donofrio said. He pointed to the bank's earlier disclosures that indicate that the Fed's short-term rate increase would boost the metric by about $150 million.
Bank of America's gains from higher rates were lifted by the fact that they didn't pay depositors much interest. The bank paid 0.09% on U.S. interest-bearing deposits, just one basis point above what it paid a year earlier and flat from the fourth quarter.
Trading has started 2017 strong, compared with a weak 2016 start. Trading revenue at Bank of America, excluding an accounting adjustment, rose 22.5% to $4.029 billion from $3.288 billion in the first quarter of last year.
In addition to trading, profit was up in the bank's main business units, including consumer banking, global wealth and investment management, and global banking.
Loans, whose growth has started slowing down across the banking industry, grew 0.6% from the year earlier and was flat from the prior quarter. The broader slowdown in lending runs counter to the optimism that Mr. Moynihan and other bank executives have said they're hearing from customers. "People have to remember, it's a 2% growth economy. So the loan demand is going to match that," Mr. Moynihan said in April.
Quarterly noninterest expenses rose 0.2% to $14.848 billion from $14.816 billion a year ago. Mr. Moynihan has made cost-cutting a key tenet of his business strategy, and last year he promised to cut another $5 billion in annual expenses by 2018. To get to that level, the bank would need to turn in expenses averaging $13.25 billion a quarter.
Now investors are hoping to see the bank get approval for a higher dividend or share repurchases in this coming round of the Federal Reserve's stress tests.
Write to Rachel Louise Ensign at email@example.com
(END) Dow Jones Newswires
April 18, 2017 12:06 ET (16:06 GMT)
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