BofA Boasts Of “Best First Half In History” Despite Revenue Drop, Muted Loan Growth

Bank of America joined JPMorgan (if not Wells Fargo) in reporting Q2 earnings that beat on the top and bottom line, reporting Q2 Net Income of $6.8 BN, up 33% from the $5.1BN a year ago, and EPS of $0.63, above consensus exp. of $0.57, and the highest quarterly EPS in the past decade, on revenue of $22.6BN, less than last year’s $22.8BN but better than the $22.1BN expected. According to CFO Paul Donofrio on the earnings call, this was “the best first half in the company’s history” even though the bank just reported its first revenue decline in 2 years.

A big contributor to the jump in the bottom line is the lower tax rate, although pretax income also jumped 11% due to “improved operating performance.”

CEO Moynihan noted the bank’s expense cutting, expenses as well as growth in different areas of the bank:

Solid operating leverage and client activity drove earnings higher this quarter. Responsible growth continued to deliver as a driver for every area of the company. We grew consumer and commercial loans; we grew deposits; we grew assets within our Merrill Edge business; we generated more net new households in Merrill Lynch; and we supported more institutional client activity — all of this while we continued to invest in our businesses and began an additional $500 million technology investment, which we intend to spend over the next several quarters, due to the benefits we received from tax reform.’

As it has done in recent quarters, BofA showed a chart demonstrating its improving operating leverage, which has increased for 14 consecutive quarters, with Q2’s decline in revenue growth offset by a bigger Y/Y drop in operating expenses.

Looking at the balance sheet, BofA reported a very modest, 2% Y/Y increase in loans and leases, which rose to $935BN in Q2 from $932BN in Q1 and up from $915BN a year ago, missing expectations of $943BN and surprising many market observers . The modest increase was the result of an increase in loans in Consumer banking, Wealth Management, Global Banking and Global Markets, offset by a drop in Residential Mortgage and Home Equity loans.

While loans increased, deposits declined modestly, from $1.328TN  in Q1 to $1.310TN in Q2. The bank notes that rising rates are causing some wealthy clients to move their money from lower-yielding deposits to higher yielding investments in the Global Wealth and Investment Management business, a part of the so-called “deposit beta” shift.

Looking at the bank’s asset quality, the bank reported total net charge-offs of $1.0B, which increased $0.1B from 1Q18; with the net charge-off ratio increasing 3 bps to 0.43%.  Consumer net charge-offs were flat at $0.8B, and reflected seasonally higher losses in credit card, offset by improvement in home equity. Meanwhile, provision expense of $0.8B decreased modestly from 1Q18. BofA also took advantage of a net reserve release of $0.2B in 2Q18, which reflected “improvements in consumer real estate and energy, partially offset by portfolio seasoning in consumer credit card.”

The Provision for credit card losses also jumped by just over $100MM Y/Y to $827MM, from $726MM a year earlier.

BofA’s allowance for loan and lease losses of $10.1B, represented 1.08% of total loans and leases, while nonperforming loans (NPLs) decreased $0.5B from 1Q18, “driven by improvements in both consumer and commercial.”

Looking at the income statement, the bank reported a 6% increase in net interest income to $11.7 billion, driven by higher interest rates and one additional interest accrual day, partially offset by seasonally lower Global Markets and credit card NII, and increased $0.7BN from 2Q17, reflecting higher interest rates and loan and deposit growth, offset by a decline resulting from the sale of the non-U.S. consumer credit card business in 2Q17 and higher funding costs in Global Markets.

However, in a disappointing tangent, BofA also reported a decline in its NIM, with net interest yield declining by 1 basis point to 2.38% from 2.39% last quarter, if 4 bps higher from 2Q17, which “reflected the benefits from spread improvement, offset by a reduction in the non-U.S. consumer credit card portfolio (higher-yielding asset), as well as the impact from an increase in Global Markets assets (lower-yielding).” BofA also clarified that excluding Global Markets, the net interest yield would have been 2.95%, up 12 bps from 2Q17.

While net revenue dipped by $200MM, this was more than offset by a $600MM drop in noninterest expense, which declined 5% from $14.0N to $13.3BN Y/Y, “due to the absence of a $0.3B impairment charge in 2Q17 related to certain data centers, as well as reduced support costs and lower litigation.” Noninterest expense also declined from 1Q18, due primarily to the absence of seasonally elevated payroll taxes, while the efficiency ratio improved to 59% in 2Q18.

Revenues at the consumer bank were up from higher interest rates, deposit and loan growth, and higher income from cards. The one offset was lower mortgage banking income. Here BofA also set more money for credit losses, with provisions for credit losses increasing $110 million to $944MM, which the bank attributed to credit-card portfolio seasoning and loan growth.

The consumer bank’s also said that deposit transactions over mobile devices exceeded ones in the bank’s financial centers for the first time. Digital sales now account for 24% of all consumer banking sales, BofA says.

Finally, something interesting: the rate on BofA’s total interest-bearing deposits ($873BN) rose from 0.17% in Q2 2017 to 0.43% this quarter as the Fed’s monetary tightening continues.

* * *

But focusing on the one income segment which is of most interest to investors, the bank’s Global Markets, the bank reported beats across all key segments. Sales and trading revenue of $3.4B increased 6% from 2Q17, with FICC flat at $2.1B and Equities up 19% to $1.3B.

A detailed breakdown below:

  • Trading revenue (ex DVA) $3.6BN, up 7% Y/Y, beating the estimate $3.39BN
  • FICC trading revenue (ex DVA) $2.29 billion, up 2% Y/Y, beating the estimate $2.17BN
  • Equities trading revenue (ex DVA) $1.31 billion, up 17% Y/Y, beating the estimate $1.21BN.

As Bloomberg notes, looking at BofA’s sales & trading revenues, it “looks like a 17% boost in equities helped them post flat results, similar to what happened at JPMorgan last Friday. As we know, volatility (judging by the VIX index) increased a little bit in June compared to the first two months of the quarter.”

Separately, average total assets increased 5% from 2Q17, while the average VaR declined once more, to a multi-year low low of $30MM in 2Q18 as the bank refuses to take on substantial trading risk.

Net, the results were hardly impressive, with results across the various individual business lines slightly better than expected but hardly spectacular, with loan growth disappointing, however the negative was more than offset by the big drop in expenses. Bank of America shares are up some 1% in the pre-market.

Full presentation below (link).

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Author: Tyler Durden

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