Bank of America Earnings Beat, Benefiting Most from the Federal Reserve’s Interest Rate Hikes

Bank of America, America’s second largest investment bank reported better than expected fourth earnings Friday. Three of the largest U.S. lenders, JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) also reported. Bank of America said revenue rose to $24.5 billion in the quarter, 11% higher from the year-ago quarter. Earnings of $7.1 billion, or 85 cents a share were slightly ahead of the $7 billion the bank earned last year. Net interest income climbed 29% to $14.7 billion for the quarter as the lender benefited from the Federal Reserve’s interest-rate increases in 2022. BAC also added to its reserves for soured loans by $403 million, compared with an $851 million release of reserves in the year-ago quarter.

Bank of America Mortgage

Bank of America Corporation NYSE: BAC Report Earnings Before Open Friday

Bank of America Earnings

Q4 2022 earnings released at 6:45 a.m. ET; conference call at 9:30 a.m. ET

  • EPS: $0.85 Projected EPS: 78 cents
  • Revenue: $23.50B Projected revenue: $24.3 billion
  • Trading Revenue Ex-DVA: $3.72B (exp $3.31B)
  • Sales and trading revenue up 20% to $3.5 billion, including net debit valuation adjustment (DVA) losses of $193 million.
  • FICC Trading Revenue Ex-DVA: $2.34B (exp $1.93B)
  • Fixed Income Currencies and Commodities (FICC) revenue up 37% to $2.2 billion and Equities revenue up less than 1% to $1.4 billion
  • Net interest income surged 29% to $14.7 billion, driven by higher interest rates.
  • Non-interest income however, declined 8% to $9.9 billion on the back of lower investment banking and asset management fees.
  • Consumer banking division had a 15% rise in revenue of $10.8 billion. Adding 195,000 new customer accounts in the fourth quarter of last year.
  • Global market revenue increased 1% to $3.9 billion.
  • Provision For Credit Losses: $1.1B (exp $1.02B)

BAC: Stock Market Reaction

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Bank of America’s chief executive Brian Moynihan said; “We ended the year on a strong note, growing earnings year over year in the fourth quarter in an increasingly slowing economic environment,” adding “The themes in the quarter have been consistent all year as organic growth and rates helped deliver the value of our deposit franchise.”

Outlook

“We believe we are well positioned as we begin 2023 to deliver for our clients, shareholders and the communities we serve,” Moynihan said.

Mortgage Market Slowdown

Bank of America is the largest mortgage lender in the US, with mortgages applications falling its profits will fall accordingly. November US existing home sales from the National Association of Realtors fell 7.7% month-over-month in November to a seasonally adjusted annual rate of 4.09 million (consensus 4.20 million) versus an unrevised 4.43 million in October.

That is the tenth straight month that existing home sales have fallen. Total sales in November were down 35.4% from a year ago. Median price growth has slowed meaningfully as higher mortgage rates and inflation has enforced affordability pressures.

Bank of America Last Quarter Earnings

Higher Interest Rates Increase Revenue …. But at a Cost

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. With higher interest rates from the Federal Reserve’s aggressive rate hiking revenues are expected to rise from a year earlier. Net interest income (NII) widened as the net interest margin widened, simply the gap has widened the gap between what the big commercial banks pay depositors and what they earn lending money out.

Revenue, net of interest expense, increased 11% to $24.5 billion
– Net interest income (NII)(E) up $3.3 billion, or 29%, to $14.7 billion, driven by benefits from higher interest rates, including lower premium amortization expense, and solid loan growth

The Federal Deposit Insurance Corp said the margin increased the most on a quarterly basis in the third quarter, and in Q4 banks have continued to grow their loan books, particularly commercial and industrial and credit-card loans. It is expected that NII continued to be the primary driver of performance during last year’s fourth quarter

However, there is a price for this, the clearest is the housing market which with the collapse in affordability through higher rates and inflation has dropped off dramatically ion activity. For banks this means the fee income from home lending has fallen right off.

Rising rates have also had another big impact for Banks, and Central banks alike, the higher rates have seen huge losses on the bond paper they hold. When interest rates go up, bond prices go down, meaning there are significant unrealized losses at current prices. JPMorgan took a loss of almost $1 billion from selling Treasurys and mortgage-backed securities in the third quarter.

FactSet expects the negatives to outweigh the positives and expect the big banks post $28 billion in fourth-quarter profits, which is down 15% from a year earlier.

Credit Losses

Last quarter BAC’s evolving provision for credit losses showed the company was beginning to factor in a harsher economic outlook. BAC added to its reserves for soured loans by $403 million, compared with an $851 million release of reserves in the year-ago quarter.

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

Net income of $1.2 billion decreased 2%
– Pretax income of $1.6 billion decreased 2%
– Pretax, pre-provision income(D) of $1.6 billion increased 4%
– 7th consecutive quarter of operating leverage
– Pretax margin 29%

Outlook

“We believe we are well positioned as we begin 2023 to deliver for our clients, shareholders and the communities we serve,” Moynihan said.

Analysts Outlook on Banks

RBC Capital MarketsGerard Cassidy

NII will continue to be the “primary driver of performance” during last year’s fourth quarter. Large banks are expected to report NII growth average above 30% during the quarter. In 2023, if the Fed pauses rate hikes, NII will slow from an “unsustainable pace” in 2022 to “what we think will be 10% to 12%,” Cassidy said. “Net interest income growth is going to be the talk amongst investors for the quarter and the year.”

Combined total revenue, net interest and noninterest income should “not be materially different” next year, even though NII “will come down meaningfully.” “The reason being is that you’re going to see fee revenues go from a negative year-over-year comparison, we think, to a positive one”.

Higher loan-loss provisions could be likely for two reasons. One is that “it’s very hard to see around corners,” he said. “The forecast is saying you’ve got to build up reserves.” “If you’re a bank, why not assume the worst and jack up reserves in the fourth quarter?”

“Throw in a much bigger number than you need, then go light on provisioning next year and show better earnings growth than your peers.”

Wedbush

Banks are likely to report “solid” but “moderating” NII growth and net interest margins. Predict “generally weaker” fee income during the fourth quarter, contributing to a 6.8% decline in noninterest income for regional banks compared to the same period in 2021,

“Peak loan growth in the current cycle could be behind us.” Fourth-quarter results are likely to show loan growth at a “solid” but moderated” pace. “Particularly concerned” about the slowing pace of CRE. Noted it typically takes around a year after the Fed begins a rate-hike cycle for loans to “begin rolling over.”

Loan growth could go two ways: either momentum builds in higher-yielding segments alongside increasing commercial utilization rates, or “cautious corporates and a weaker consumer” causes “loan growth [to] grind to a halt.”

“While loans have been growing, deposits have been shrinking,” “Depositors are waking up and starting to demand yield on their cash”.

Barclays

Expect “more modest” bank revenue alongside similar NII growth throughout the year. 2023 will bring “loan-loss normalization” if the Fed pauses rate hikes. Asset-sensitive business groups such as lower-end consumer and commercial real estate to be “less constructive” and areas where “loan losses will adjust the fastest.”

Source: BAC, TC, WSJ

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