By Christina Rexrode And Peter Rudegeair
Bank of America Corp. Chief Executive Brian Moynihan finally got
to report quarterly earnings that weren't decimated by legal costs.
But the results showed the nation's second-largest lender by assets
relying on cost cutting to offset the punishing impact of low
interest rates and a drop in trading revenue.
The Charlotte, N.C., bank on Wednesday said it swung to a
first-quarter profit. That was largely because the bank's legal
expenses fell sharply from last year, when the company logged a
mortgage settlement with federal housing regulators and built
towards a record mortgage-securities settlement with the Justice
Department.
But the latest results missed the expectations of analysts
polled by Thomson Reuters, and investors pushed the shares 1.1%
lower on a day when other major U.S. bank shares rose. The lender's
trading performance fell short of rival J.P. Morgan Chase &
Co.'s, and overall revenue declined even as J.P. Morgan and Wells
Fargo & Co. posted gains.
Bank of America's net interest income fell 6% from a year ago to
$9.7 billion. On an adjusted basis, it declined 4%.
Mr. Moynihan vowed to continue cutting costs: First-quarter
expenses plunged 29% as the bank trimmed its spending on personnel,
equipment and other business costs, and shrunk the unit that
handles delinquent mortgages.
Much of the expense decline, though, came from the drop in legal
costs, which fell to $370 million from $6 billion a year ago. It
was the bank's lowest quarterly legal expense in years.
The bank's profit was $3.36 billion, or 27 cents a share, up
from a loss of $276 million, or five cents a share, in the same
period of 2014. Analysts had expected earnings of 29 cents a
share.
Revenue fell 6% to $21.42 billion. Analysts had expected $21.51
billion.
Some analysts said Bank of America still needs to prove that its
strategies extend beyond just cutting costs, and that it knows how
to grow even if rates remain low.
"They're making progress on multiple fronts yet it's not
resulting in earnings right now," said Glenn Schorr, an analyst at
Evercore ISI. "It's OK, but it's not good enough."
Like its peers, Bank of America has suffered in the era of low
interest rates, since that limits its lending income. The bank's
large mortgage business and other consumer lending help keep it
particularly tied to the rate picture.
Chief Financial Officer Bruce Thompson said on a call with
reporters that the outlook for rising rates has been "tougher than
we expected." The bank calculated it could earn an extra $4.6
billion in net interest income if both short- and long-term
interest rates rise by one percentage point, a move that would
still leave them at relatively low rates historically.
UBS analyst Brennan Hawken described Bank of America as having
"a few more issues to hammer out," noting the drop in revenue and
an expected industrywide settlement over alleged manipulation of
foreign-exchange rates.
Mortgages were a bright spot in the quarter: Bank of America
funded $16.9 billion in new mortgages and home-equity loans, a jump
of 56% from $10.8 billion a year ago. The investment bank recorded
the highest revenue from advising on deals since its 2009 merger
with Merrill Lynch & Co., Bank executives also noted a jump in
foreign-exchange trading.
But the forex-trading revenue wasn't enough to prevent a drop in
the broader unit that trades fixed-income, currencies and
commodities. Revenue there fell 7% to $2.75 billion. That was in
contrast to J.P. Morgan, where FICC trading revenue rose 5% in the
first quarter.
On a call with bank executives, NAB Research analyst Nancy Bush
asked if the bank's trading strategy needed tweaking.
"Have you derisked the trading desk to the point where you can't
really take full advantage of the volatility in markets?" she
asked.
Mr. Moynihan replied that the bank's trading makeup created
lower risk and would perform better when credit products pick
up.
"It's not an existential question at all," Mr. Moynihan
said.
The bank said that much of the difference in trading performance
between it and J.P. Morgan has to do with the types of products
that the two banks trade. J.P. Morgan tends to focus on
foreign-exchange and rate products, which had a strong quarter.
Actions by central banks around the world, and an unexpected surge
in the Swiss franc, stirred up volatility in those markets and
encouraged investors to jump in. The credit products and
mortgage-backed securities that Bank of America's bond traders
focus on had a weak quarter, as did the leveraged lending business
that has been targeted as risky by banking regulators.
The bank said that some of declines were part of a calculated
strategy: Total loans fell, but Mr. Thompson said that is because
the bank is running off troubled home-equity lines and some other
loans. Overall revenue slipped, but the bank said that is largely
because it has gotten rid of investments in other companies.
But not everyone is convinced.
"Just talking about improvements ... doesn't cut it anymore,"
said FBR Capital Markets analyst Paul Miller, citing the lack of
revenue growth. "Investors want to actually see it at this
point."
Write to Peter Rudegeair at peter.rudegeair@wsj.com
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