Tax Shift, Ri­sing Rates Lift BofA

L'Opinion - - The Wall Street Journal & L'opnion - Ra­chel Louise En­sig

Bank of Ame­ri­ca Corp. said Mon­day that a boost from the U. S. tax law and ri­sing in­ter­est rates hel­ped first-quar­ter pro­fit rise 30%, ex­ten­ding the string of bet­ter-than- ex­pec­ted re­sults from the na­tion’s big­gest banks.

Quar­ter­ly pro­fit at the Char­lotte, N.C.- ba­sed bank rose to $6.92 bil­lion from $5.34 bil­lion a year ear­lier. Per- share ear­nings were 62 cents; ana­lysts had ex­pec­ted 59 cents. Re­ve­nue came in at $23.13 bil­lion, up from $22.25 bil­lion a year ear­lier. Ana­lysts had ex­pec­ted $23.06 bil­lion.

This quar­ter is the first time in­ves­tors have a chance to see exact­ly how much the recent tax law is hel­ping the bank’s bot­tom line. The ban­king in­dus­try was one of the big­gest be­ne­fi­cia­ries of the lo­wer cor­po­rate tax rate. While it led to big one-time charges last quar­ter, the lo­wer rate is star­ting to lift bank ear­nings this quar­ter. Much of that is al­rea­dy in ana­lysts’ es­ti­mates for the bank’s fu­ture pro­fit, ho­we­ver. And some of the ex­pec­ted­se­con­da­ry be­ne­fits of the tax bill, such as in­vi­go­ra­ted loan growth, have yet to ma­te­ria­lize across the in­dus­try.

Bank of Ame­ri­ca said its ef­fec­tive tax rate fell by 9 per­cen­tage points be­cause of the bill. In the quar­ter, the bank paid $1.48 bil­lion in in­come taxes, com­pa­red with $1.98 bil­lion a year ear­lier.

The tax be­ne­fits not­withs­tan­ding, the bank’s un­der­lying per­for­mance al­so was strong. In­come be­fore taxes – a way to look at the bank’s per­for­mance wi­thout the tax boost – in­crea­sed about 15% to $8.39 bil­lion from $7.32 bil­lion a year ear­lier.

Those fac­tors meant a key pro­fi­ta­bi­li­ty me­tric, re­turn on equi­ty, rea­ched a mi­les­tone. The fi­gure rose to 10.85%,above the bank’s theo­re­ti­cal 10% cost of ca­pi­tal. That on­ly hap­pe­ned once be­fore in Chief Exe­cu­tive Brian Moy­ni­han’s eight-year te­nure, in 2011 when unu­sual one­time fac­tors in­fla­ted the fi­gure. Other than that, the bank last pas­sed 10% in 2007, right be­fore its fi­nan­cial state ra­pid­ly de­te­rio­ra­ted du­ring the fi­nan­cial cri­sis.

The first quar­ter was “a so­lid bu­si­ness en­vi­ron­ment with good eco­no­mic me­trics. And we conti­nue to get our fair share in that en­vi­ron­ment,” Mr. Moy­ni­han said on a call with ana­lysts.

The re­sults re­flec­ted the bank’s years­long stra­te­gy of boos- ting pro­fits by cut­ting ex­penses, fo­cu­sing on lo­wer-risk plain-va­nilla ban­king ser­vices and put­ting cri­sis-era hea­daches in the past.

Ri­sing in­ter­est rates have hel­ped. Hi­gher rates are ty­pi­cal­ly good for banks be­cause they turn a pro­fit on the dif­fe­rence bet­ween what they pay on de­po­sits and the rate they col­lect on loans. In the quar­ter, the Fe­de­ral Re­serve rai­sed its bench­mark rate for a sixth time. Bank of Ame­ri­ca said its net in­ter­est in­come, or pro­fit from in­ter­est, rose about 5% from a year ear­lier. Banks have been able to po­cket much of the be­ne­fit from the rate in­creases be­cause cus­to­mers aren’t de­man­ding more in­ter­est. The rate Bank of Ame­ri­ca paid on U. S. in­ter­est- bea­ring de­po­sits was 0.30%, on­ly a slight rise from 0.27% in the prior quar­ter. Still, de­po­sits rose more than 4% from a year ear­lier.

Loan growth, which has slo­wed across the in­dus­try since the 2016 pre­si­den­tial election, rose 3% from a year ear­lier at Bank of Ame­ri­ca.

In the first quar­ter, the bank’s ex­penses fell about 1% to $13.90 bil­lion from $14.09 bil­lion a year ear­lier. That hel­ped push the firm’s ef­fi­cien­cy ra­tio, which mea­sures ex­penses as a per­cen­tage of re­ve­nue, be­low 60%, com­pa­red with 62.8% a year ear­lier.

The bank re­cent­ly an­noun­ced that plans to open branches in ci­ties where it pre­vious­ly had none wouldn’t ele­vate ove­rall costs. The bank’s to­tal branch count, which has stea­di­ly drop­ped as more consu­mers turn to di­gi­tal tools and the bank prunes less pro­fi­table lo­ca­tions, should be “re­la­ti­ve­ly stable from here,” Chief Fi­nan­cial Of­fi­cer Paul Do­no­frio said on a call with re­por­ters.

Al­so, af­ter a num­ber of quar­ters of di­sap­poin­ting tra­ding re­ve­nue, wild price swings for mar­kets in the first quar­ter meant Wall Street’s tra­ding desks had a bet­ter quar­ter. Still, re­sults we­ren’t much above a year ear­lier, which al­so was bu­sy fol­lo­wing the 2016 U.S. pre­si­den­tial election.

Tra­ding re­ve­nue, ex­clu­ding an ac­coun­ting ad­just­ment, rose less than 1% to $4.05 bil­lion from $4.03 bil­lion in the first quar­ter of last year. Equi­ties re­ve­nue in­crea­sed 38%, while re­ve­nue from fixed in­come, cur­ren­cy and com­mo­di­ties was down 13%.


A flag flies in front of Bank of Ame­ri­ca’s cor­po­rate head­quar­ters in Char­lotte.

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