Bank of America produced its third successive rise in quarterly profits on the back of Wall Street’s trading resurgence and a long-awaited rise in interest rates, a sign that it is making a sustained turnround after years of post-crisis underperformance.
The second-biggest US bank by assets on Tuesday reported a stronger-than-expected 40 per cent jump in net income to $4.86bn, magnifying the disappointment for rival Goldman Sachs, whose profits fell short of forecasts.
Brian Moynihan, chairman and chief executive, said: “The US economy continues to show consumer and business optimism, and our results reflect that.”
BofA’s earnings followed an upbeat trend set last week by JPMorgan Chase and Citigroup. “This is the type of quarter investors have been waiting for from BofA,” said Glenn Schorr, analyst at Evercore ISI.
In particular, the “Trump trade” led revenues from fixed income, currencies and commodities to surge 29 per cent to $2.93bn, in stark contrast to Goldman’s, which were unchanged from the tough period a year ago.
Revenues from equities, a business that BofA has been investing in, also improved, up 7 per cent to $1.1bn. Investment banking fees leapt by a third to $1.6bn.
BofA shares were down 0.44 per cent at $22.71 at the close in New York, after rising from about $17 just before the presidential election.
Paul Donofrio, chief financial officer, suggested that the scale of the improvements in retail and investment banking could be lower in the second quarter. “I’m not suggesting we won’t see a benefit — I’m just cautioning people about the magnitude,” he said of interest income in the months ahead.
Net income from the consumer banking division rose 7 per cent to $1.89bn as BofA started to benefit from the Fed’s tightening of monetary policy, allowing it to charge borrowers higher interest rates.
BofA is seen as being particularly well placed to benefit from higher interest rates because of the composition of its balance sheet.
Net interest margins — a measure of the difference between what banks charge borrowers and what they pay out on deposits, which have been at historic lows in the post crisis era of rock bottom rates — improved from 2.33 per cent to 2.39 per cent.
Yet total loans and leases ticked up only 0.6 per cent, the latest sign that US banks have eased off on the lending accelerator in recent months.
The bank produced a 7.27 per cent return on average common shareholders’ equity, up from 5.11 per cent a year ago, but short of the double digit performance put in by some rivals including JPMorgan.
Shares in Bank of America were among the biggest winners in the US stock market’s post-election rally, gaining as much as 50 per cent as investors bet that it would benefit from lower taxes, lighter regulation and higher interest rates. But they have lost 12 per cent per cent since March as the most bullish expectations faded.
Mr Moynihan took the helm seven years ago as the bank was grappling with the immediate aftermath of the financial crisis.
Since then he has disposed of non-core assets and cut costs, although the shares have lagged behind rivals.
Next week, the bank faces another vote on whether the chairman and chief executive roles should be separated, almost two years after it survived an investor rebellion on the issue.
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