Bank of America Earnings: Playing It Too Safe

(Bloomberg Gadfly) -- Bank of America Corp. CEO Brian Moynihan pledged in his recent letter to shareholders to keep the bank on the path of "growing responsibly." The question is whether keeping Bank of America straight has narrowed its profits too much. 

The first quarter appeared to support that. Bank of America said Monday morning that its quarterly earnings per share rose nearly 38 percent to 62 cents, which was 3 cents more than the 59 cents analysts were expecting. The bank's revenue of $23.1 billion, however, beat expectations by slightly more than $100 million. And its loan growth was lower than many analysts' expectations. Bank of America was not alone in its loan-growth struggles in the first three months of the year. JPMorgan Chase & Co. reported on Friday that its lending growth had slowed in the first quarter. Wells Fargo's lending fell from the year before. Disappointing lending growth appeared to be a chief reason bank stocks slumped on Friday.

Bank of America Earnings: Playing It Too Safe

But Bank of America's loan growth, at 3 percent from a year ago, was even lower than the disappointing results of its rivals. Loans at JPMorgan in the first quarter rose 4 percent from a year ago. Citigroup Inc.'s were up 7 percent. In recent years, Bank of America has shied away from some of the riskiest areas of the lending business. It was once one of the biggest lenders in the mortgage space, but since the financial crisis it has ceded much of its market share to JPMorgan and Wells Fargo. And in recent years it hasn't followed either Citigroup into the riskier portion of the credit card business or Wells Fargo into subprime auto lending. A recent loss in margin lending, related to troubled South African retailer Steinhoff, has caused Bank of America to rethink whether it wants to be in that business. Rivals, which have suffered margin-lending losses as well, haven't signaled a similar retreat, though Bank of America's Steinhoff hit was the biggest among large American banks.

Bank of America Earnings: Playing It Too Safe

Even considering the Steinhoff loan, Bank of America had lower lending losses than its rivals. In the first quarter, Bank of America charged off $911 million in loans, a rate of just 0.4 percent of its outstanding loans, down from 0.53 percent in the last three months of 2017. JPMorgan had charge-off rate of 0.55 percent in the first quarter. Citi's charge-off rate, driven by losses in its credit-card business, rose to just more than 1 percent in the first quarter. Wells Fargo, which has other issues, had a charge-off rate of just 0.29 percent.

But Bank of America's cautiousness appears to have crimped its profits as well. In addition to slower lending growth, the bank's loan book is generating skimpier interest income. The bank's average loan yield -- the amount of interest it was collecting on its loans -- was just more than 4.2 percent in the quarter, lower than its rivals. JPMorgan had a loan yield of 4.87 percent, while Citi's was nearly 7 percent.

Bank of America Earnings: Playing It Too Safe

This wasn't how it was supposed to work out. Bank of America has long maintained that its large branch network and loyal customers would allow it to reap large profits when the economy improved. But Bank of America's own borrowing costs in the quarter rose 50 percent, which was a bigger jump than at it rivals, and it paid an average deposit rate of 0.36 percent, which was more than double the 0.14 percent it paid a year ago. Similar to other banks, the big savior of the quarter was equity trading revenue, which was up 38 percent. But Bank of America's debt traders had a rougher quarter than rivals at other banks. Fixed-income and commodity trading fell 13 percent.  

The economy has been expanding for a while. And consumer losses are starting to tick up, especially in the riskier areas that Bank of America has avoided. If the economy sours more quickly than expected, consumer losses could spike. There are times to be cautious, and Bank of America may eventually be proved correct that this one is one of them. But if the economy continues to chug along, fueled by tax cuts, Bank of America may find there's such a thing as playing it too safe.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

To contact the author of this story: Stephen Gandel in New York at sgandel2@bloomberg.net.

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