Tax Shift, Rising Rates Lift BofA
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.