Bank of America Earnings Hurt by Tax-Related Charge -- 5th Update
Bank of America Corp. said Wednesday that its fourth-quarter profit fell from a year ago, hurt by a $2.9 billion charge related to the tax bill, even as the bank ended a year that put its crisis-era issues firmly in the past.
The Charlotte, N.C.-based bank reported a profit of $2.37 billion, or 20 cents a share. Without the tax charge, the bank's profit was $5.3 billion, or 47 cents a share. Analysts polled by Thomson Reuters had expected earnings of 44 cents a share, on an adjusted basis.
Excluding the tax charges, the bank posted a $21.1 billion profit for 2017, matching the bank's 2006 all-time profit record. Bank of America shares were flat in premarket trading.
Investors are expected to look past the one-time charges because they are likely to be outweighed by the new tax law's longer-term benefits. Starting this year, a lower corporate tax rate is expected to boost Bank of America's profit by 16%, according to Bernstein analysts.
The bank expects its effective tax rate for 2018 to be 20%, down from an expected 29% before the new tax law, Chief Financial Officer Paul Donofrio said on a call with reporters Wednesday morning.
Chief Executive Brian Moynihan said on the call that he expects most of the bank's benefit from the tax cut will go to shareholders. Some of it will be spent on investments. He also reiterated that he expects the tax changes to eventually lead to more loan growth.
In the fourth quarter, total revenue was $20.4 billion for the fourth quarter, but $21.4 billion if excluding the tax-bill related items. That compares to $19.99 billion a year earlier.
While the new tax law hurt Bank of America's results in the fourth quarter, Mr. Donofrio said the changes will soon turn positive. In addition to the lower tax rate, Mr. Donofrio says the new law "will level the playing field" for the U.S. against other countries.
"We benefit when U.S. consumers and corporations can grow and when there is more economic activity in the U.S.," he said.
Mr. Moynihan said that once the bank hits its long-held performance goals, it plans to go beyond them.
In the fourth quarter, the bank came relatively close to meeting those goals, which include a 1% return on average assets and a 12% return on average tangible common equity. Excluding the effect of the tax bill, those metrics stood at 0.9% and 10.9%.
Bank of America's quarterly return on equity was 7.8%, down slightly from 8.1% the prior quarter and below the bank's 10% theoretical cost of capital.
As recently as 2014, Bank of America's results were dogged by tens of billions of dollars in penalties over financial-crisis era issues. Since then, the company's legal problems have eased, as Mr. Moynihan has made a concerted effort to cut costs and focus on safer businesses such as lending to consumers with good credit.
The bank also has had the help of rising interest rates, which are boosting profits. The bank's net-interest income rose to $11.462 billion from the prior quarter.
It paid slightly higher rates to depositors in the quarter. The rate the bank paid on U.S. interest-bearing deposits was 0.27%, compared with 0.24% in the prior quarter.
Trading revenue was a weak spot, as it has been for other large U.S. banks including Goldman Sachs Group Inc. Excluding an accounting adjustment, Bank of America's trading revenue fell about 9% to $2.66 billion from $2.91 billion in last year's fourth quarter.
Another issue was a $292 million charge-off related to "a single-name non-U.S. commercial" client in the fourth quarter. A person familiar with the matter said this was the bank's lending activity involving troubled firm Steinhoff International Holdings NV. JPMorgan Chase & Co. and Citigroup Inc. both took similar charges for loans involving the retailer, which is battling a burgeoning financial crisis after disclosing possible accounting irregularities
Loan growth, which has slowed down across the banking industry, grew 2% from a year earlier. The slowdown in lending across the industry runs counter to the optimism that bank executives have said they are hearing from customers. Executives are hoping tax reform kick-starts borrowing.
Investment banking rose 16% from a year earlier.
Expenses for 2017 were $54.743 billion, just above the $53 billion target the bank has set for 2018.
The lender's overall improving fortunes helped lift its stock above $30 a share for the first time since 2008 earlier this year. Shares are up 84% since the 2016 presidential election, when hopes for deregulation, tax cuts and rate increases sent stocks in the sector higher.
Still, the bank had to issue so many new shares to deal with its crisis-era problems that per-share profits remain far below pre-2008 levels. And the bank still trades at a lower valuation than some competitors like JPMorgan Chase.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
Bank of America Corp. said a charge from the new U.S. tax law caused quarterly profit to fall bay 48%, even as the bank ended 2017 with its crisis-era issues firmly in the past.
The Charlotte, N.C.-based bank on Wednesday reported fourth-quarter profit of $2.37 billion, or 20 cents a share. That was down from $4.54 billion a year earlier.
Without the $2.9 billion tax charge, however, the bank's profit would have risen to $5.3 billion, or 47 cents a share. Analysts polled by Thomson Reuters had expected earnings of 44 cents a share on an adjusted basis.
For the year, the bank posted a $21.1 billion profit, excluding the tax adjustment. That roughly matched the bank's all-time profit record from 2006, when it was a simpler consumer-focused firm that hadn't yet bought ailing mortgage lender Countrywide Financial Corp. or investment bank Merrill Lynch & Co.
The bank's executives said Wednesday that the 2018 outlook is bright. That is because the one-time hit from the tax bill is expected to be outweighed by the law's longer-term benefits.
The fourth-quarter charge was largely due to the bank writing down its deferred tax assets. These credits to offset future tax bills were created by past losses, in many cases huge ones racked up during the financial crisis. The assets generally lose value when tax rates fall.
The bank expects its effective tax rate for 2018 to be 20%, down from an expected 29% before the new tax law, Chief Financial Officer Paul Donofrio said on a call with reporters Wednesday morning.
Chief Executive Brian Moynihan said he expected most of the bank's benefit from the tax cut would go to shareholders, who should expect higher capital returns in the form of dividends or share buybacks. Some of it will be spent on investments. Mr. Moynihan also reiterated that he expected tax changes would eventually lead to more loan growth.
The benefits from the tax bill are expected to accelerate the progress Bank of America has made rebuilding its business after the financial crisis. As recently as 2014, the lender's results were dogged by tens of billions of dollars in penalties over financial-crisis era issues. Since then, the company's legal problems have eased, as Mr. Moynihan has made a concerted effort to cut costs and focus on safer businesses such as lending to consumers with good credit.
The boost from the tax bill will expedite the bank's timeline for meeting long-held performance goals of a 1% return on assets and a 12% return on tangible common equity, Mr. Moynihan said. Excluding the effect of the tax bill, those metrics stood at 0.9% and 10.9% in the fourth quarter.
The bank has recently had the help of rising interest rates, which are boosting profits. Bank of America's net-interest income was $11.46 billion, up about 11% from a year earlier. It paid slightly higher rates to depositors in the quarter, though holders of regular savings accounts are still getting almost nothing in interest. The rate the bank paid on U.S. interest-bearing deposits was 0.27%, compared with 0.24% in the prior quarter.
It also cut expenses to $54.74 billion on the year, coming closer to a $53 billion target the bank has set for 2018. Revenue for the year rose 4% to $87.4 billion.
There were still some hiccups in the quarter. One was a $292 million charge related to "a single-name non-U.S. commercial" client in the fourth quarter. A person familiar with the matter said this came from the bank's lending activity involving troubled firm Steinhoff International Holdings NV. JPMorgan Chase & Co. and Citigroup Inc. both took similar charges for loans involving the retailer, which is battling burgeoning financial problems after disclosing possible accounting irregularities.
Trading revenue was another weak spot, as it has been for other large U.S. banks including Goldman Sachs Group Inc. Excluding an accounting adjustment, Bank of America's trading revenue fell about 9% to $2.66 billion from $2.91 billion in last year's fourth quarter, though that was less than the bank initially predicted.
The lender's improving fortunes recently helped lift its stock above $30 a share for the first time since 2008. Shares are up more than 80% since the 2016 presidential election, when hopes for deregulation, tax cuts and rate increases sent stocks in the sector higher. Shareholders greeted Bank of America's latest results with caution, sending the bank's shares 0.8% lower in morning trading.
The bank had to issue so many new shares to deal with its crisis-era problems that per-share profits remain far below pre-2008 levels. And Bank of America still trades at a lower valuation than some competitors like JPMorgan Chase.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
January 17, 2018 12:34 ET (17:34 GMT)