Bank of America profitability boosted by tax cuts and higher rates

April 16, 2018 0 By admin

Lower taxes and higher interest rates have helped Bank of America reach an important threshold for profitability for the first time in seven years, the latest sign that the industry bellwether has put its post-crisis malaise behind it.

After years in which its return on common equity has fallen short of the double-digit level that investors in the sector have traditionally demanded, BofA reported a figure of 10.8 per cent for the first three months of 2018.

In spite of the stronger-than-forecast results, however, the bank’s shares ticked up only 1 per cent on Monday, in line with the broader market, showing how much investor expectations have risen. Bond trading revenues fell in the quarter, and bearish analysts said they were underwhelmed by the bank’s lending volumes.

Paul Donofrio, chief financial officer, highlighted that BofA’s net income of $6.91bn, up 30 per cent from a year earlier, was the highest it had ever produced.

While profits were boosted by a lower quarterly income tax bill, which dropped more than a quarter from a year ago to $1.5bn, Mr Donofrio noted that pre-tax income was also up 15 per cent. “This quarter is not an anomaly,” he added.

The figures from the second-biggest US bank by assets follow similarly upbeat updates from rivals JPMorgan Chase and Citigroup last week. Taken together, they suggest that the promised “Trump bump” — which has driven S&P 500 bank stocks 44 per cent higher overall since the 2016 presidential election — is finally flowing through to bottom lines.

Monday’s results mark the first time since the third quarter of 2011 — when profits were supported by one-time gains — that BofA produced a return on equity above 10 per cent, according to S&P Capital IQ. Analysts have forecast a 10.3 per cent return for the full year, the strongest annual performance since the financial crisis.

Despite this, David Hendler, founder of Viola Risk Advisors, said the bank was still playing “catch up” to JPMorgan, which produced an ROE of 15 per cent in the quarter. 

Steven Chubak, analyst at Nomura, said: “The results can best be described as good, not great.”

BofA is regarded as among the biggest potential beneficiaries of higher interest rates because of its particular mix of assets and liabilities.

Revenues from consumer banking rose 9 per cent from a year ago to $9bn as the lender increased charges for borrowers while keeping deposit rates little changed. Borrower default rates meanwhile remain minimal — the bank wrote off only 0.4 per cent of loans in the quarter.

Executives have also expanded the loan book — balances for residential mortgages, credit cards and US commercial lending balances each rose between 4 and 6 per cent — although the level of increase disappointed some analysts.

“Bank of America has a huge deposits cost advantage and needs to demonstrate greater levels of loan volume growth,” Mr Hendler said.

The performance of the investment bank was also mixed.

The return of volatility to financial markets helped equities, where sales and trading revenues leapt 38 per cent to $1.5bn, but it failed to boost the larger fixed income division. Revenues from fixed income, commodities and currencies fell 13 per cent to $2.5bn.

Mr Donofrio said the bank’s debt capital markets (DCM) business — helping companies raise finance — had enjoyed a strong period a year ago, and the division posted improvements in rates and currencies.

“We didn’t see as much DCM activity,” he said. “It’s just a relative comparison.”

Overall, the bank delivered earnings of 62 cents per share — better than the 59 cents analysts had pencilled in. Revenues rose 4 per cent to $23.1bn.

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