By Christina Rexrode and Peter Rudegeair 

Bank of America Corp. said its quarterly earnings were dragged down by continued low interest rates, but a pickup in bond trading helped results beat expectations.

The Charlotte, N.C.-based lender reported a profit of $4.23 billion, or 36 cents a share. That compares with $5.13 billion, or 45 cents a share, in the same period of 2015. The latest results included 6 cents a share in market-related charges. Analysts polled by Thomson Reuters had expected the bank to earn 33 cents a share.

Revenue fell 7.1% to $20.4 billion from $21.96 billion a year ago. Adjusted revenue was $20.6 billion, above the $20.41 billion expected by analysts.

Shares edged up 0.9% premarket.

The trading business, for years a drag on big-bank earnings growth, this quarter proved a surprising standout. Excluding an accounting adjustment, Bank of America's trading revenue rose 12% to $3.7 billion from $3.32 billion in the second quarter of last year. J.P. Morgan Chase & Co. last week reported a 23% increase in trading revenue, and Citigroup Inc. reported a 15% increase.

Bond, currency and commodity trading revenue rose 22% to $2.62 billion from $2.14 billion a year ago. J.P. Morgan and Citigroup also reported higher revenue in that unit. That was spurred by the uncertainty caused by the U.K.'s vote on June 23 to leave the European Union, which caused a mini-boom in trading currencies and fixed-income products in the final week of the quarter.

Chief Financial Officer Paul Donofrio said on a call with reporters that the bank enjoyed a strong quarter in both credit trading and interest-rate businesses. On the day after the Brexit vote, the bank also logged its busiest day in equities trading since the financial crisis, helping mitigate an overall 7.6% decline in the business for the quarter from a year ago.

"We flawlessly managed these higher volumes," Mr. Donofrio said of the Brexit response. Overall, stock trading revenue stood at $1.09 billion, up about 6% from the first quarter.

Things have been relatively calm for the bank, the second largest in the U.S. by assets, and Chairman and CEO Brian Moynihan. Last month, it passed the Federal Reserve's stress test without incident for the first time since 2013. The crisis-era legal fees that dogged earnings have been receding for a couple years.

One of Mr. Moynihan's key tenets has been cutting costs, but some analysts are questioning whether more dramatic changes are needed. The bank cut expenses 3.3% to $13.49 billion compared with a year ago, the lowest level since the fourth quarter of 2008. But those lower costs are partly because the bank no longer has to spend as much on servicing troubled mortgages. The bank's efficiency ratio was 65.43%, down about 10 percentage points from the first quarter but higher than the low 60s goal that Mr. Moynihan has set. "We continue to manage expenses well," Mr. Moynihan said on a call with analysts. "The questions is: how much more can we do?"

Mr. Moynihan, who has led the bank for six and a half years, is working to pivot to improving earnings, shareholder returns and the bank's stock price. That task has been made more difficult of late by long-term bond yields falling, something that hurts the bank's lending profitability and investments in mortgage securities.

The bank is particularly hurt by lower-for-longer U.S. interest rates because of its large base of U.S. deposits and mortgage bond portfolio. The Federal Reserve doesn't seem poised to increase rates any time given the uncertainty wrought by the U.K.'s decision last month to leave the European Union. Net interest income fell 12% to $9.21 billion from $10.46 billion a year ago, a sharper drop than seen by other big banks.

Part of the decline is related to Bank of America's idiosyncratic accounting for a large portfolio of mortgage bonds that it holds for investment. Unlike its large peers, Bank of America adjusts the premium it paid to acquire mortgage bonds in light of how interest rates moved during the quarter. Lower rates tend to drive refinancing activity and results in an expected drop in income from those bonds.

In this year's second quarter, the bank took a negative $1 billion adjustment on that portfolio, but in last year's second quarter, the bank recorded a positive $700 million mark as long-term interest rates rose during that time.

Mr. Donofrio, who has been finance chief for about a year, said the accounting adjustment made earnings inconsistent and that he was thinking about ditching the method.

Mr. Moynihan has long laid out a goal of a 1% return on assets, but has said he won't be able to do it until interest rates are higher. The bank's return on assets was 0.78% in the second quarter.

Profit in global markets, which includes the trading unit, rose 42%. Mr. Moynihan said last month that he expected to continue trimming the trading unit. Some analysts have questioned whether he has the right business mix in trading: The bank, compared with rival J.P. Morgan, is less focused on rates and currencies products, which got a boost in the last week of the quarter from Brexit-related trading.

Profit in global banking, which includes the investment bank, rose 21%. Profit in the consumer bank rose 3.4%. Profit in the wealth management unit rose 7.9%. Mr. Donofrio said that the U.S. is in an "ongoing" recovery, with businesses expanding and employment improving. But he gave no hint that the bank plans to loosen its lending standards. "In the consumer area we're focused on prime and super prime," he said, "and I don't see that changing."

Bank of America's shares have fallen 19% since the start of the year, compared with an 8% drop in the KBW Nasdaq index of bank stocks.

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

 

(END) Dow Jones Newswires

July 18, 2016 09:32 ET (13:32 GMT)

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