Bank of America Beats Estimates Amid Spike in Lending

Like JPMorgan Chase and Citigroup, Bank of America's performance improved notably from the first quarter. Lenders were racked by swelling energy-loan losses. Plus, what Jim Cramer thinks.
By James Langford ,

Bank of America (BAC) - Get Report posted higher quarterly profit than analysts estimated as total lending increased and trading revenue rebounded from a turbulent start to 2016.

Profit of 36 cents a share compared with the 33-cent average from analysts in a Bloomberg survey. Despite the year-to-date improvement, net income fell 20% to $4.2 billion from a year earlier, reflecting lower consumer fees, higher provisions for credit losses and a drop in stock underwriting. Revenue dropped 7.1% to $20.4 billion, matching projections.

Still, like rivals JPMorgan Chase (JPM) - Get Report and Citigroup (C) - Get Report , Bank of America's performance improved notably from the first quarter, when lenders were racked by swelling energy-loan losses, slowing growth in China and uncertainty about interest-rate increases in the U.S. 

"We had another solid quarter in a challenging environment," CEO Brian Moynihan said in a statement. "Our responsible growth strategy led to improved customer and client activity." 

Moynihan, who has been working to rebuild the bank after its costly acquisitions of investment bank Merrill Lynch and troubled lender Countrywide Financial before the 2008 financial crisis, won approval last month to raise its quarterly dividend by 50% and start a $5 billion stock-buyback plan.

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Bank of America rose 1.5% to $13.86 at 9:54 a.m. Monday in New York. The stock previously fell 19% this year, making it the second-worst performer on the KBW Bank Index.

Because the stock is trading below its tangible book value, a measure of a company's worth once liabilities are paid off, every dollar spent on share repurchases is "added to their earnings," said TheStreet's Jim Cramer. "And they have a lot of permission to buy a lot of stock back."

Second-quarter sales and trading revenue climbed 14% to $3.5 billion compared with the first three months of the year, the Charlotte, N.C.-based company said in the statement. Investment banking revenue, including merger advisory services, grew 17% in the same period. Average loans in the consumer business, the bank's largest, increased 2.1% to $242.9 billion.

The company, like its rivals, faces an ongoing challenge from lower interest rates, which the Federal Reserve has raised only once since cutting them to nearly zero during the 2008 crisis. Bank of America's net interest margin, a gauge of lending profitability, tightened 34 basis points to 2.03% over the past 12 months.

The Fed's monetary policy committee boosted short-term rates by 25 basis points in December, but then trimmed its outlook for further increases amid volatility early in the year due to slowing growth in China and sliding oil prices.

After markets were roiled again by Great Britain's decision to leave the European Union, futures traders largely discounted the possibility that the Fed would raises rates at all this year. That's unwelcome news for traditional banks, which typically boost profitability by passing on higher rates more quickly to borrowers than to their depositors.

The tighter margin, in fact, helped trim Bank of America's interest income 12% from a year earlier to $9.2 billion, despite companywide loan growth. 

"For bank management and for you as investors, it would be easier if rates were to rise, but that hasn't been the case," Moynihan said on an earnings call. Still, he said, the bank can boost profits by increasing fee revenue, continuing to manage risk well and carefully managing expenses.

In the three months through June, costs excluding interest payments dropped 3% from a year earlier to $13.5 billion, Moynihan noted.

"This continues a trend of performance that has shown expenses declining significantly on a quarterly basis quarter after quarter over the past several years," he added. "This is the lowest level that we have reported since the fourth quarter of 2008, and that's prior to the Merrill Lynch merger."

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