Bank of America Earnings Hit by $1.6 Billion LIBOR and $2.1 Billion FIDC Related Charges

Bank of America, America’s second largest bank reported weaker than expected fourth earnings Friday. BAC net income fell to $3.1 billion, or 35 cents per share, in the quarter, down over 50% from $7.1 billion, or 85 cents per share, a year ago. Revenue of $22.1 billion fell short of Wall Street’s estimates for the first time in two years and was down 10% from the year-ago period. The bank was hit by a pretax charge of $1.6 billion related to the transition away from the London Interbank Offered Rate (LIBOR). The bank also was hit by a special $2.1 billion fee charged by the Federal Deposit Insurance Corporation tied to the failures of Silicon Valley Bank and Signature Bank. Excluding items, the company said it earned 70 cents per share, which beat analysts’ expectations.

Bank of America Mortgage

Bank of America Corporation NYSE: BAC Reported Earnings Before Open Tuesday

Bank of America reported along with three of the largest U.S. lenders. There were mixed results at the close; Wells Fargo (WFC 47.40, -1.64, -3.3%), Bank of America (BAC 32.80, -0.35, -1.1%), JPMorgan Chase (JPM 169.05, -1.25, -0.7%) were lower while and Citigroup (C 52.62, +0.54, +1.0%) was higher. BlackRock (BLK) also reported. Notably all exceeded consensus earnings estimates for the December quarter and didn’t sound any real macro alarm bells.

Bank of America Q4 2023 Earnings

Q4 2023 earnings released at 6:45 a.m. ET; conference call at 9:30 a.m. ET

  • Bank of America net income fell to $3.1 billion, or 35 cents per share, in the fourth quarter, down more than 50% from $7.1 billion, or 85 cents per share, a year ago.
  • Earnings per share: 70 cents, adjusted vs. 68 cents expected.
  • Revenue: $22.1 billion vs. $23.74 billion expected.
  • Revenue from consumer banking dipped 4% to $10.3 billion,
  • Sales and trading revenue went up 3% to $3.6 billion.
  • Pretax charge of $1.6 billion in the quarter related to the transition away from the London Interbank Offered Rate.
  • Hit by special $2.1 billion fee charged by the Federal Deposit Insurance Corporation. The fee is tied to the failures of Silicon Valley Bank and Signature Bank.
  • $1.1 billion provision for credit losses, up $12 million from the same quarter last year.
  • Net interest income decreased 5% to $13.9 billion due to higher deposit costs and lower deposit balances, which more than offset higher asset yields.

“We reported solid fourth quarter and full-year results as all our businesses achieved strong organic growth, with record client activity and digital engagement,” CEO Brian Moynihan said in a statement. “Our expense discipline allowed us to continue investing in growth initiatives. Strong capital and liquidity levels position us well to continue to deliver responsible growth in 2024.”

BAC: Stock Market Reaction

  • $27.79 ▲ +0.80 (+2.95%) today
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  • $27.79 ▲ +1.38 (+5.23%) past 5 years
  • 52wk High $38.60
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Bank of America stock is down 2.6% this year after a meagre 1.7% gain in 2023. The S&P 500 financial sector gained 10% last year.

Higher Interest Rates Increase Revenue …. But at a Cost

Bank of America said its net interest income decreased 5% to $13.9 billion due to higher deposit costs and lower deposit balances, which more than offset higher asset yields.

Bank of America has been 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.

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. Higher deposit costs is a factor behind lower interest income.

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.

Security Portfolio Losses

The nation’s second-largest bank posted a $1.1 billion provision for credit losses, up $12 million from the same quarter last year.

The bank was supposed to be one of the biggest beneficiaries of higher interest rates last year, but the lender went heavy into low-yielding, long-dated securities during the Covid-19 pandemic. Those securities lost value as interest rates climbed.

Unrealized losses have come under closer scrutiny by investors since March. At the time, Silicon Valley Bank sold a portfolio of its holdings at a sharp loss, precipitating its collapse and fueling the worst industry turmoil since the 2008 financial crisis.

The Bank of America portfolio consists mostly of agency mortgage securities is weighing on the bank’s interest margins as deposit costs continue to increase. The bank’s total debt portfolio with an average yield of about 2.5% is considerably below market, with current yields on mortgage securities exceeding 5%. The bank’s mortgage securities portfolio totaling around $485 billion was valued at about 83 cents on the dollar at the end of the second quarter.

Last quarter we saw that the loss on Bank of America’s huge portfolio of debt securities widened to $131.6 billion on securities held until maturity in the third quarter, growing from nearly $106 billion in paper losses in the second quarter. The lender had about $603 billion in held-to-maturity securities, it said in a filing on Tuesday, shrinking from $614 billion in the second quarter.

The numbers come from supplemental data disclosed in conjunction with the bank’s earnings release Tuesday morning.

Analysts say it is highly unlikely that Bank of America would sell the securities at a loss.

“All of these are unrealized losses are on government- guaranteed securities,” Bank of America’s chief financial officer, Alastair Borthwick, told reporters on conference call discussing third-quarter earnings. “Because we’re holding them to maturity, we will anticipate that we’ll have zero losses over time.”

“Held-to-maturity” debt portfolio losses.

JPMorgan Chase (JPM) had unrealized losses of $40 billion in its HTM portfolio in the third quarter. Citigroup (C) did not disclose paper losses on its portfolio for the third quarter. They stood at $24 billion at the end of the second quarter.

Outlook

Bank of America CEO Brian Moynihan said“We see the consumer activity indicating that they’re still in the game,” Moynihan said on the call Friday. “They’re still spending money, where they spend it is a little different—more in services and going out and restaurants and experiences and less on goods at retail.”

“So they’re working, they’re getting paid to have balance in their accounts,” he added. “They have access to credit. They’ve locked in good rates on their mortgages, and they’re employed.” “We think the soft landing is a core thesis,” he said.

Management expects the bank’s net interest income–the profit earned on loans and other products that charge interest–to tip lower during the first half of 2024 and grow in the second half due to several factors, including deposit growth and lower-yielding securities coming off the balance sheet and being reinvested.

Bank of America Last Quarter Earnings

Bank of America’s Competitors Q4 Earnings:

Source: BAC, TC, WSJ

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