Bank of America profit falls under the weight of low rates

July 18, 2016 09:01 AM

Bank of America Corp. reported a 19% drop in second-quarter profit today as growth in businesses from lending to trading failed to offset the impact of persistently low interest rates.

Like other lenders, the Charlotte, North Carolina-based bank has been struggling under the weight of low rates for years, but analysts say Bank of America is particularly sensitive to the issue because of how management has positioned its balance sheet. Accounting oddities related to interest rates also dented the bank's profit during the quarter.

Net income attributable to Bank of America's common shareholders fell to $3.87 billion, or 36 cents per share, in the second quarter ended June 30, from $4.80 billion, or 43 cents per share, a year earlier. 

Excluding special items, the bank earned 37 cents per share, beating the average analyst estimate of 33 cents, according to Thomson Reuters.

Bank of America's decline in profits mirrored that of other rivals that have reported results so far, including JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc.

After keeping rates near-zero for seven years, the U.S. Federal Reserve bumped its target slightly higher last December. But optimism has faded that rates will continue moving upward in the near-term, especially after Britain's shocking vote to leave the European Union.

On a conference call with journalists following the report, Chief Financial Officer Paul Donofrio said the bank was doing all it could to blunt the impact of low interest rates. Management is keeping a tight lid on expenses and lending more, for instance.

Still, the bank reported a 12% decline in net interest income - a measurement of how much a bank can earn by lending and investing its deposits and other funds - showing how difficult it was for Bank of America to boost earnings as rates fell during the quarter.

"Our results were impacted by a significant decline in long-term interest rates," Donofrio said. "We were able to offset some of this impact by focusing on the things that we control and drive, such as growing loans and deposits, managing risk and expenses and delivering for our clients."

Bank of America, the second-largest U.S. bank by assets, was also hurt by its choice some years ago of an accounting method known as FAS 91. The method affects when it can report earnings from the ups and downs of interest rates, Donofrio said.

The method led Bank of America to adjust its income downward by $1 billion during the quarter. In the year-ago quarter, FAS 91 boosted Bank of America's results. Donofrio said he is considering whether to switch to another accounting method to avoid the earnings volatility it creates.

Separately, the bank also took a $200 million negative adjustment related to the value of its own debt. Altogether the adjustments hurt earnings by six cents per share.

In reports immediately following Bank of America's results, analysts said its underlying profit was reasonably strong, given the environment. In a presentation, the bank said net income in each of its four key businesses grew, when stripping out the accounting adjustments and assets it is winding down.

Overall, Bank of America's adjusted revenue of $20.8 billion topped estimates of $20.4 billion, according to Thomson Reuters.

Trading was particularly strong, as Bank of America handled high volumes following the vote in Britain, known as Brexit. Adjusted trading revenue rose 12% to $3.7 billion in the quarter. Fixed income, currency and commodities trading revenue rose 22%.

Bank of America's stock was little changed in premarket trading following the results.

Up to Friday's close of $13.66, Bank of America's shares had fallen about 19% since the start of the year. The KBW bank index fell 8% over the period.

About the Author