BofA Results Map Out Low-Rate Profit Route -- WSJ
October 18 2016 - 3:02AM
Dow Jones News
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 18, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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