DealBook: Bank of America Profit Rises 63%

Richard Drew/Associated PressA Bank of America branch in New York.

Bank of America on Wednesday became the latest large bank to report second-quarter financial results that exceeded Wall Street’s expectations.

Net income rose 63 percent, to $4 billion, or 32 cents a share, from $2.5 billion, or 19 cents a share, in the period a year earlier, while revenue increased to $22.7 billion from $22 billion.

Analysts had been expecting second-quarter earnings per share of 25 cents, according to Thomson Reuters.

The bank benefited from higher revenue from equities sales and trading and a reduction in expenses, but its mortgage unit continued to struggle.

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“We are doing more business with our customers and clients, and gaining momentum across every customer group we serve,” Brian T. Moynihan, the bank’s chief executive, said in a statement. “We must keep improving, but with the consumer recovering and businesses strong, we have lots of opportunity ahead.”

Despite the big rise in earnings, investors may question the strength of the quarter.

While revenue rose, much of the increase came from Bank of America’s Wall Street businesses, whose performance can be uneven over longer periods. Profit also received a lift from lower expenses. The bank paid substantially less interest on its own borrowings, compared with the second quarter of 2012. It also set aside less for its bad loan reserve and spent substantially less on mortgage litigation expenses.

Bank of America also provided estimates of how it would fare under a new, proposed rule that focuses on capital, the financial buffer banks are required to maintain to absorb losses.

Investors are fixated on this issue right now, fearing that the largest banks might have to raise large amounts of new capital to comply with the rule.

But Bank of America may already meet the requirements, according to estimates the bank provided on Wednesday. The rules require a so-called leverage ratio of 5 percent at a bank’s holding company.

Bank of America estimated on Wednesday that its leverage ratio would be 4.9 to 5 percent at its parent company. The proposed rules also require a 6 percent ratio at banking subsidiaries that are covered by federal deposit insurance. Bank of America’s chief financial officer, Bruce R. Thompson, said during a news briefing on Wednesday that he thought the two largest subsidiaries already had enough capital to comply with the 6 percent requirement.

A vast financial supermarket, Bank of America makes loans to consumers and companies and has a big presence on Wall Street. Since the financial crisis, the bank has struggled to reassert itself in crucial businesses. It was particularly hampered by large and lingering losses stemming from Countrywide Financial, the mortgage giant it acquired in 2008.

Some analysts thought the bank performed relatively well in the quarter but still needed to make further progress.

“This was a quarter in which Bank of America executed on the strategies it has laid out,” said Shannon Stemm, a banking analyst at Edward Jones. “But it’s still got work to do.”

One challenge is achieving revenue growth when interest rates are low and its balance sheet is not growing. Bank of America’s total assets fell slightly in the second quarter. Still, it managed to increase revenue by 3 percent. The bank also managed to cut costs, which helped drive an increase in earnings that far exceeded the growth in revenue.

“A lot of this is about expenses,” said Richard Ramsden, a banking analyst at Goldman Sachs. “People really want to see revenue stabilize and expenses drop.”

Some of the cost-cutting may be hard to sustain, though.

In the second quarter, Bank of America registered significant savings by paying less for the money it borrows. The main reason is that it is sharply reducing its long-term debt, which costs more than other types of borrowing. But the reductions may ultimately run into a new rule regulators are preparing that would require banks to hold set amounts of long-term debt.

Another big expense reduction may be hard to repeat. The costs related to the litigation of bad mortgages was $471 million in the second quarter, about half the amount a year ago. Adverse legal outcomes and new settlements could drive litigation expenses higher again, analysts said.

“The litigation expense is one that we are modeling down over time,” Ms. Stemm said. “But that doesn’t account for the one-off risk of a large settlement.”

Still, Bank of America appears to be making progress in the unit that deals with borrowers who have fallen behind on their mortgage payments. The expenses related to collecting payments and negotiating loan modifications have been high at Bank of America. But the bank said on Wednesday that it expected the number of mortgages that are more than two months past due to decline to 375,000 by the fourth quarter, compared with its previous estimate of 400,000 by the end of the year. Expenses in the unit are also expected to fall, the bank said.

Cutting costs can only go so far, so Bank of America also needs to find ways to generate some revenue growth.

Part of the problem is Bank of America’s conflicted relationship with mortgages after the financial crisis. It was inundated with Countrywide’s bad loans, and it was late to participate in the latest mortgage refinancing boom, which was a big source of revenue for many banks. And since the crisis, Wells Fargo has become the predominant mortgage bank, making it difficult for rivals to regain their precrisis foothold.

Bank of America wants to increase its share of the mortgage market, and it made some gains in the second quarter, but the challenges of the market were apparent.

Even though Bank of America originated more mortgages in the quarter than it did in the period a year earlier, its revenue from making home loans fell. The financial gain that banks make from selling mortgages to government entities has fallen, which hurts mortgage revenue.

The amount of refinancing has dropped off as interest rates have climbed. As a result, banks hope borrowers will take out more original mortgages if the housing recovery continues, but this business is still relatively quiet.

With consumer businesses lackluster, Bank of America had to rely on Wall Street for growth.

Fees from advising on mergers and acquisitions and underwriting stock and bond deals were up. Managing money for wealthy individuals was also strong. At the Merrill Lynch Wealth Management unit, revenue rose 10.5 percent, to $3.74 billion.

Wall Street businesses can be volatile, though.

That was apparent in Bank of America’s trading results. Revenue from trading stocks rose nearly 60 percent, to $1.2 billion. But the fixed-income unit that trades bonds, currencies, commodities and derivatives linked to those assets, didn’t fare as well. Its revenue fell 5 percent, to $2.3 billion.

Bank of America’s rivals have so far reported increases of more than 10 percent in fixed-income revenue growth in the quarter.

In a news release, Bank of America said fixed-income results were affected by the sell-off in bonds that took place in the second quarter after the Federal Reserve said it was contemplating reducing its stimulus policies.

Bank of America shares were up 3.6 percent in afternoon trading, suggesting investors were pleased with the results. Mr. Ramsden, the Goldman analyst, said the market was keen to see revenue stabilize, costs come down and strong indications that the bank has built up sufficient capital.

“They are doing all three,” he said. “The debate is going to be, are they moving fast enough?”

Article source: http://dealbook.nytimes.com/2013/07/17/bank-of-america-profit-rises-63/?partner=rss&emc=rss