Higher Rates Benefit BofA -- WSJ

Fed's increases help quarterly earnings jump 10%, but trading revenue declines

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 19, 2017).

Bank of America Corp. said its second-quarter profit climbed 10% as the bank continued to pocket gains from Federal Reserve rate hikes.

Quarterly profit at the Charlotte, N.C.-based bank was $5.27 billion, compared with $4.78 billion a year ago. Per share, earnings of 46 cents beat the 43 cents a share that analysts expected.

Second-quarter revenue was $22.83 billion, up from $21.29 billion a year ago. On an adjusted basis, revenue was $23.07 billion, compared with analysts' expectations of $21.78 billion.

Bank of America's large base of U.S. deposits and rate-sensitive mortgage securities makes it particularly poised to benefit from an uptick in interest rates, which recently started rising after years of record lows. But declining long-term bond yields and other factors meant that the second quarter was a mixed bag for net interest income, a key measure of lending profits.

On one hand, net interest income rose 8.6% from the year-ago period to $10.99 billion. The lender was able to keep most of the benefit from rising short-term rates because it hasn't faced competitive pressure to increase deposit rates for customers.

The Federal Reserve raised short-term interest rates, which influence the rate the bank earns on loans and securities, twice so far in 2017. But the rate the bank paid on U.S. interest-bearing deposits has barely budged: it stood at 0.11% in the second quarter, compared with 0.09% in the prior quarter.

The rates the bank is paying depositors are "amazingly low," said Glenn Schorr, a bank analyst at Evercore ISI. Analysts have attributed depositors' reluctance to chase higher yields at other banks to a variety of factors including the convenience of BofA's large branch network and digital capabilities.

But when compared with the first quarter of 2017, the bank's net interest income metric was less impressive. The metric, which Bank of America initially said would rise about $150 million, fell by $72 million. In May, the lender said the sale of a business and a reversal in long-term bond yields would eliminate most of that projected gain.

On Tuesday, bank executives said they expected net-interest income to rise in the third quarter from the second quarter. But they declined to specify by how much. "I think we want to get out of the game of putting size parameters on it," said Paul Donofrio, the bank's chief financial officer.

Shares moved 1.5% lower in morning trading, sharper than the fall in the KBW Nasdaq Bank Index but less dramatic than the 2.4% decline in shares of Goldman Sachs Group Inc., which also reported earnings Tuesday.

Still, Bank of America shares are up more than 40% since the November election. The initial share-price gains after Donald Trump's surprise victory have been sustained as the lighter regulatory touch investors hoped for has started to materialize. In late June, Bank of America got Federal Reserve approval for a large increase in its dividend and stock buybacks.

The lender, the second largest U.S. bank by assets, faced challenges in the second quarter. Trading revenue at Bank of America, excluding an accounting adjustment, fell 9% to $3.37 billion from $3.7 billion in the second quarter of last year. The drop was, however, less than some analysts predicted. Similar factors weighed on earnings reports from J.P. Morgan Chase & Co. and other big lenders that reported their earnings on Friday.

Loans at the bank were up 1.5% from a year earlier. Loan growth has slowed down across the banking industry, though there's debate about whether that has been caused by borrower reluctance or lenders hoarding capital to meet regulatory requirements.

Quarterly expenses rose 1.7% to $13.73 billion, from $13.49 billion a year ago. Chief Executive Brian 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.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

(END) Dow Jones Newswires

July 19, 2017 02:49 ET (06:49 GMT)