By Christina Rexrode and Peter Rudegeair 

Bank of America Corp.'s third-quarter earnings gave investors a glimpse of what they have long wanted: a path to higher profits without higher interest rates.

Especially strong trading results played a part in that. This, along with buoyant performance from J.P. Morgan Chase & Co. and Citigroup Inc. on Friday, also gave investors hope that Wall Street's core trading engine may have finally stopped sputtering.

At all three banks, the trading gains helped make up for less impressive results in consumer banking and the ever-present pressure of superlow interest rates. But even if this was the second consecutive quarter in which trading activity was solid, analysts questioned how long gains would last.

Much of the quarter's trading activity was driven by uncertainty around economic events, including the Federal Reserve's next steps on interest rates and the U.K.'s vote to leave the European Union. "Is it just a couple of good quarters?" asked Brian Foran, an analyst at Autonomous Research.

It also isn't clear whether Wall Street banks simply are profiting from trouble in Europe. Rivals there, notably Deutsche Bank AG and Credit Suisse AG, have been forced to scale back some trading activities.

Bank of America's chief executive, Brian Moynihan, said Monday the bank had benefited from "global peers restructuring," but he wasn't specific.

For several years now, Wall Street has debated whether often-lackluster trading activity was the result of a structural downturn -- created by new, tighter regulation and changed trading behavior among big investors -- or more normal cyclical factors. The latest quarter won't decide the argument, but suggests the worst might be past.

Revenue in the Bank of America unit that trades fixed-income, currencies and commodities climbed 39% versus a year earlier. J.P. Morgan posted a 48% gain and at Citigroup it was 35%.

At Bank of America, the second largest U.S. bank by assets, that helped fuel a 7.3% rise in net income from a year earlier to $4.96 billion. Meanwhile, revenue net of interest expense rose 3.1% to $21.64 billion.

The increases came against what Bank of America described as a more positive economic backdrop. "The economy feels good, so we're confident we can grow," Chief Financial Officer Paul Donofrio said while acknowledging uncertainty around the U.S. election and in "certain sectors and certain regions around the world."

What hasn't improved, though, is the interest-rate environment. Although the Federal Reserve increased rates last December, it hasn't followed through with more moves. That is keeping banks under pressure, especially Bank of America due to its large, U.S. deposit base and portfolio of mortgage-backed securities.

Indeed, Bank of America's return on equity was 7.27%. While up slightly from 7.16% a year ago, that remains well below the bank's theoretical cost of capital of about 10%.

Even so, the bank's net interest income rose 3%, and Mr. Moynihan said Bank of America was working "on the things we can control: expenses, loan and deposit growth, and steady growth." In terms of costs, the bank's efficiency ratio -- a measure of expenses as a percentage of revenue -- fell to 61.66% in the third quarter, a marked improvement from 65.7% a year earlier.

Mr. Moynihan, the CEO for nearly seven years, has made cost-cutting a key tenet of his business strategy, and expenses declined 3% over the year as the bank slashed more than 6,000 jobs and 100 branches. Over the summer Mr. Moynihan promised to cut an additional $5 billion in annual expenses by 2018. To get to that level, the bank would need to turn in expenses averaging $13.25 billion a quarter, compared with $13.48 billion in the third quarter.

Elsewhere, revenue was flat in the consumer bank. Bank of America sought to distance itself from the retail-bank sales practices that caused a crisis at Wells Fargo & Co., leading to the early retirement last week of CEO John Stumpf. Mr. Donofrio told reporters on a conference call that Bank of America's regular reviews of this business and its practices haven't uncovered "anything that concerns us."

Revenue also was down slightly in the bank's wealth management unit, which is grappling with new rules from the U.S. Department of Labor. This month, Bank of America told its brokers that it will scrap commission-based accounts for retirement savers, a change that could be more expensive for some clients.

But executives rebuffed several questions from analysts on whether that shift would cost revenue or cause some financial advisers to bolt for firms that still allow them to charge commissions. "We have the biggest and most capable business in the world making more money and having better margins than anybody else," Mr. Moynihan said. "I think we'll figure it out."

Write to Christina Rexrode at christina.rexrode@wsj.com and Peter Rudegeair at Peter.Rudegeair@wsj.com

 

(END) Dow Jones Newswires

October 17, 2016 16:15 ET (20:15 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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