Bank of America Earnings Hurt by Tax-Related Charge -- 4th Update
January 17 2018 - 9:40AM
Dow Jones News
By Rachel Louise Ensign
Bank of America Corp. said Wednesday that its fourth-quarter
profit fell from a year ago, hurt by a $2.9 billion charge related
to the tax bill, even as the bank ended a year that put its
crisis-era issues firmly in the past.
The Charlotte, N.C.-based bank reported a profit of $2.37
billion, or 20 cents a share. Without the tax charge, the bank's
profit was $5.3 billion, or 47 cents a share. Analysts polled by
Thomson Reuters had expected earnings of 44 cents a share, on an
adjusted basis.
Excluding the tax charges, the bank posted a $21.1 billion
profit for 2017, matching the bank's 2006 all-time profit record.
Bank of America shares were flat in premarket trading.
Investors are expected to look past the one-time charges because
they are likely to be outweighed by the new tax law's longer-term
benefits. Starting this year, a lower corporate tax rate is
expected to boost Bank of America's profit by 16%, according to
Bernstein analysts.
The bank expects its effective tax rate for 2018 to be 20%, down
from an expected 29% before the new tax law, Chief Financial
Officer Paul Donofrio said on a call with reporters Wednesday
morning.
Chief Executive Brian Moynihan said on the call that he expects
most of the bank's benefit from the tax cut will go to
shareholders. Some of it will be spent on investments. He also
reiterated that he expects the tax changes to eventually lead to
more loan growth.
In the fourth quarter, total revenue was $20.4 billion for the
fourth quarter, but $21.4 billion if excluding the tax-bill related
items. That compares to $19.99 billion a year earlier.
While the new tax law hurt Bank of America's results in the
fourth quarter, Mr. Donofrio said the changes will soon turn
positive. In addition to the lower tax rate, Mr. Donofrio says the
new law "will level the playing field" for the U.S. against other
countries.
"We benefit when U.S. consumers and corporations can grow and
when there is more economic activity in the U.S.," he said.
Mr. Moynihan said that once the bank hits its long-held
performance goals, it plans to go beyond them.
In the fourth quarter, the bank came relatively close to meeting
those goals, which include a 1% return on average assets and a 12%
return on average tangible common equity. Excluding the effect of
the tax bill, those metrics stood at 0.9% and 10.9%.
Bank of America's quarterly return on equity was 7.8%, down
slightly from 8.1% the prior quarter and below the bank's 10%
theoretical cost of capital.
As recently as 2014, Bank of America's results were dogged by
tens of billions of dollars in penalties over financial-crisis era
issues. Since then, the company's legal problems have eased, as Mr.
Moynihan has made a concerted effort to cut costs and focus on
safer businesses such as lending to consumers with good credit.
The bank also has had the help of rising interest rates, which
are boosting profits. The bank's net-interest income rose to
$11.462 billion from the prior quarter.
It paid slightly higher rates to depositors in the quarter. The
rate the bank paid on U.S. interest-bearing deposits was 0.27%,
compared with 0.24% in the prior quarter.
Trading revenue was a weak spot, as it has been for other large
U.S. banks including Goldman Sachs Group Inc. Excluding an
accounting adjustment, Bank of America's trading revenue fell about
9% to $2.66 billion from $2.91 billion in last year's fourth
quarter.
Another issue was a $292 million charge-off related to "a
single-name non-U.S. commercial" client in the fourth quarter. A
person familiar with the matter said this was the bank's lending
activity involving troubled firm Steinhoff International Holdings
NV. JPMorgan Chase & Co. and Citigroup Inc. both took similar
charges for loans involving the retailer, which is battling a
burgeoning financial crisis after disclosing possible accounting
irregularities
Loan growth, which has slowed down across the banking industry,
grew 2% from a year earlier. The slowdown in lending across the
industry runs counter to the optimism that bank executives have
said they are hearing from customers. Executives are hoping tax
reform kick-starts borrowing.
Investment banking rose 16% from a year earlier.
Expenses for 2017 were $54.743 billion, just above the $53
billion target the bank has set for 2018.
The lender's overall improving fortunes helped lift its stock
above $30 a share for the first time since 2008 earlier this year.
Shares are up 84% since the 2016 presidential election, when hopes
for deregulation, tax cuts and rate increases sent stocks in the
sector higher.
Still, the bank had to issue so many new shares to deal with its
crisis-era problems that per-share profits remain far below
pre-2008 levels. And the bank still trades at a lower valuation
than some competitors like JPMorgan Chase.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
January 17, 2018 09:25 ET (14:25 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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