BofA Shares Drop as Bank Sees Interest Income Growth Fading

(Bloomberg) -- Bank of America Corp. dropped after it said the interest-rate boost that lifted first-quarter earnings is likely to fade over the rest of this year.

Net interest income will probably increase 3 percent for 2019, down from 6 percent last year and 5 percent in the first quarter, Chief Financial Officer Paul Donofrio said in a call with investors Tuesday. That may mean slowing growth for a consumer unit that drove profit to a record in the first three months of the year.

Consumer banks are reaping the benefits of the Federal Reserve’s four interest-rate increases last year and a relatively buoyant U.S. economy. The first quarter could be the last hurrah for that catalyst as the Fed pauses its rate-tightening cycle and investors prepare for the next recession.

Bank of America’s outlook is lower than the growth of more than 4 percent that analysts had expected, Buckingham Research Group’s James Mitchell wrote in a note to clients Tuesday.

Shares fell 1.9 percent to $29.27 at 11:25 a.m. in New York, the biggest decline in the S&P 500 Financials Index.

What Bloomberg Intelligence Says

“Less expected 2019 net interest income growth for Bank of America reflects the shifting interest rate environment, after nine Federal Reserve hikes aided the top and bottom lines in recent years.”
--Alison Williams, banks analyst
Click here to view the research.

Net interest income at the consumer unit -- revenue from customers’ loan payments minus what the bank pays depositors -- climbed 9.7 percent in first three months of 2019 from a year earlier, fueled by a rise in loans. That outweighed a 13 percent drop in trading revenue. The performance echoes that of Bank of America’s bigger competitor, JPMorgan Chase & Co., where NII also rose and trading revenue fell.

BofA Shares Drop as Bank Sees Interest Income Growth Fading

“Economic growth and consumer activity in the U.S. continue to be solid,” Chief Executive Officer Brian Moynihan said in a statement Tuesday. “It was a challenging capital-markets environment, but our team and platform are optimized to serve clients and generate stable revenues across a range of market conditions over time.’’

Bank of America’s trading and investment-bank results reflected investor caution even after the S&P 500 Index recouped most of its losses from a selloff at the end of 2018.

Trading revenue fell to $3.55 billion, beating analysts’ estimates of $3.49 billion. Investment-banking fees slipped 7 percent to $1.26 billion, compared with analysts’ average estimate of $1.29 billion. Still, Donofrio said the firm is gaining share in the banking business as it looks to overhaul that unit.

Read more: BofA’s investment bank gaining share, CFO says

Average loans in the consumer business climbed 5 percent, the Charlotte, North Carolina-based company said in the statement. Revenue from the unit jumped 7.3 percent to $9.63 billion. The bank’s net interest margin rose to 2.51 percent from 2.42 percent a year earlier.

Chief Financial Officer Paul Donofrio said on a conference call with journalists that the strong economy driving that demand will likely continue.

“We don’t see any evidence of a recession,” Donofrio said. “If a recession were to come, we are very well prepared.”

Other key results:

  • Net income gained 5.7 percent to $7.31 billion, or 70 cents a share, surpassing estimates of 66 cents.
  • Revenue fell slightly to $23.2 billion, matching the median analyst forecast.
  • The efficiency ratio, a measure of profitability, improved to 57.5 percent from 60 percent a year earlier. Operating leverage was positive for the 17th consecutive quarter.
  • The provision for credit losses increased $179 million to $1 billion. The net charge-off ratio increased 3 basis points to 0.43 percent.
  • Non-interest expense dropped $618 million, or 4 percent, to $13.2 billion.

©2019 Bloomberg L.P.