Bank of America profits slump as big loan losses loom
(Reuters) – Bank of America Corp saw its profits fall by more than half in the second quarter as it set aside $ 5 billion to cover potential loan losses, while warning it would struggle as long as rates interest would remain low.
The Charlotte, North Carolina-based lender is particularly vulnerable to rate fluctuations due to the makeup of its balance sheet, and at least one analyst has expressed concern about its net interest income, which is down 11%.
The bank’s shares fell about 4% in response to the results.
“When long-term and short-term interest rates are at their all-time low as they are today. This gap is smaller and we make less money, ”said CFO Paul Donofrio.
The drop in income and profits was broadly in line with other Main Street peers who have suffered from the need to prepare for a deep recession, while benefiting from the surge in trading in financial markets since February.
“Strong financial market results have provided an important counterbalance to the impacts of COVID-19 on our consumer business,” said Chief Executive Officer Brian Moynihan.
The bank allocated a much lower dollar amount to reserves this quarter than some of its peers earlier in the week, in part because it set aside more in the previous quarter.
Its provision charges only rose 7% in the second quarter, compared to a 26% increase at JPMorgan Chase & Co, a 12% jump at Citigroup Inc and a 138% jump at Wells Fargo.
He also reported a 9% drop in pre-provision income, highlighting the pressure on his business model due to the interest rate environment, even though he did not have to prepare for possible loan losses.
Donofrio, however, added that the bank was seeing the first signs of “cautious optimism” in the economy, with loan applications showing signs of life.
Net income applicable to common shareholders fell to $ 3.28 billion, or 37 cents per share, for the quarter at the end of June, beating analysts’ expectations of 26 cents per share.
Rising non-interest income, primarily in global markets and the banking unit, led the pace, but was offset by lower net interest income (NII) and loan loss provisions, UBS analyst Saul Martinez said.
The NII, a key measure of how much banks can get from their lending activities, has come under pressure from the pandemic as the U.S. Federal Reserve has cut interest rates to near zero levels.
The bank’s global markets unit net profit rose 81% to $ 1.9 billion, but income gains of 50% in fixed income, currencies and commodities (FICC ) and 7% in equity trading did not match those reported by some of its rivals.
Aggregate revenue, net of interest expense, fell 3% to $ 22.3 billion, while net personal banking income fell to $ 71 million from $ 3.29 billion a year earlier, and that of global wealth management and investment by more than 40%.
His Wall Street counterpart Morgan Stanley posted better-than-expected earnings growth on Thursday, driven by strong trading gains.
Reporting by Noor Zainab Hussain in Bengaluru and Imani Moise in New York; Editing by Lauren Tara LaCapra, Anirban Sen and Anil D’Silva