Bank of America, America’s second largest investment bank reported better than expected third earnings Monday following three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) reporting results last week. Fixed-income trading and gains in interest income boosted $BAC’s numbers. Bank of America said third-quarter profit fell 8% to $7.1 billion, or 81 cents a share, as the bank booked a $898 million provision for credit losses in the quarter. $BAC Shares rose 2.9% in premarket trading.
Bank of America Corporation NYSE: BAC Report Earnings Before Open Monday
Bank Of America Q3 22 Earnings
Q3 2022 earnings release at 7 a.m. ET; conference call at 8:30 a.m. ET
- Third-quarter profit fell 8% to $7.1 billion, or 81 cents a share
- Booked a $898 million provision for credit losses in the quarter.
- Earnings per share: 81 cents vs. 77 cents expected
- Revenue: $24.61 billion adjusted vs. $23.57 billion expected
- Investment Banking Rev: $1.17B (est $1.17B)
- Trading Revenue Ex DVA: $4.1B (est $3.81B)
- Fixed income trading revenue +27% to $2.6B (est $2.24B)
- Equities revenue -4% to $1.5B (est $1.61B)
- Net interest income rose 24% to $13.87B (est $13.6B)
- Net interest margin widened to 2.06% from 1.86%
- Revenue Net of Interest Expense: $24.50B
- $BAC $33.20 +1.53 (4.83%) Pre-Market For the year -13.05 (-28.20%)
- Shares hit a 52-wk low $29.31 last week
“Our U.S. consumer clients remained resilient with strong, although slower growing, spending levels and still maintained elevated deposit amounts,” Moynihan said in the release. “Across the bank, we grew loans by 12% over the last year as we delivered the financial resources to support our clients.”
Higher rates increase margins
Bank of America is one of the main beneficiaries of the Federal Reserve’s rate-boosting campaign, producing more revenue as rates rise, allowing them to generate more profit from their core activities of taking in deposits and making loans.
Net interest income at the bank jumped 24% to $13.87 billion in the quarter, topping the $13.6 billion StreetAccount estimate, thanks to higher rates in the quarter and an expanding book of loans.
Net interest margin, a key profitability metric for bank investors, widened to 2.06% from 1.86% in the second quarter of this year, edging out analysts’ estimate of 2.00%.
The brighter outlook for bank profits coincides with higher Treasury yields. The benchmark 10-year Treasury yield has risen dramatically for the year-to-date, with higher interest rates boosting banks income from their core lending businesses. The bank’s net interest margin, a measure of what it collects on loans minus what it pays for deposits rises with rates.
Credit Losses
BAC’s evolving provision for credit losses showed the company was beginning to factor in a harsher economic outlook.
While Bank of America released $1.1 billion in reserves in the year-earlier period, in the third quarter the firm had to build reserves by $378 million. That, in addition to a 12% increase in net charge-offs for bad loans to $520 million in the quarter, accounted for the $898 million provision.
Investment Banking Losses
Investment banking revenue posted steep declines, falling about 46% to $1.2 billion, slightly exceeding the $1.13 billion estimate.
JPMorgan President Daniel Pinto told investors last month that he expected the bank’s investment banking fees to fall between 45% and 50% in the third quarter.
Weakness has been exacerbated by a decline in large private-equity buyouts, dropping 54% to $716.62 billion in the third quarter from the same period last year, according to Dealogic data.
U.S. banks wrote down $1 billion on leveraged and bridge loans as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders. Wall Street banks took combined losses of $700 million on the sale of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc, Reuters reported last month, citing a person familiar with the matter.
The Twitter takeover by Elon Musk has been reported to lead to $500 million dollar losses for the financing banks if the deal goes ahead.
“We are expecting further losses on these deals,” said Richard Ramsden, an analyst at Goldman Sachs who oversees research on large banks. “It’s going to vary quite a bit,” depending on where the transactions were initially priced and how much exposure remains, he said.
Analysts Outlook on Banks
Oppenheimer issued a note generally positive on bank stocks due to cheap valuation. The firm noted that in in two of the last three recessions, bank stocks bottomed relative to the market either at the beginning or well before the recession began.
Oppenheimer’s favorite names are Bank of America (BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), Morgan Stanley (MS), and U.S. Bancorp (USB). In its bank preview, Morgan Stanley warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle,” noted MS. With defense seen as the best offense in the current backdrop, the firm recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).
Citigroup predicts strong earnings beat and share price pop for JPMorgan Chase (JPM) off better-than-expected net interest income. The bank’s guidance for NII is expected to be revised higher as JPM is said to have been more disciplined than others on deploying cash, and now has the opportunity to extend duration at higher rates. The firm also upgraded Bank of New York Mellon (BNY) shares to a buy rating ahead of earnings because of the bank’s relatively lower exposure to loan losses and strong return outlook.
Morgan Stanley in a note warned that inflation plus QT is a recipe for volatility. “Throw in rapidly rising, higher for longer rates and higher capital requirements and you get an accelerating credit cycle” With defense seen as the best offense in the current backdrop, MS recommends leaning into M&T Bank (NYSE:MTB), Regions Financial (RF), Wells Fargo (WFC), and First Republic Bank (FRC).
Source: BAC
Live From The Pit
From The TradersCommunity Research Desk