Bank of America (BAC - Get Report) shares tumbled Tuesday after the second-biggest U.S. bank said lending income this year would be lower than Wall Street analysts projected as the economy slows and the Federal Reserve halts its three-year campaign to boost official interest rates.
Net interest income -- what the bank collects on mortgages, credit cards and business loans minus what it pays out on deposits -- will grow by about 3% this year, the Charlotte-based bank's executives told analysts on a conference call.
That growth rate would be well below the 5.6% clip projected by analysts in a survey by the data provider FactSet. Last year, Bank of America's lending income increased by about 6%.
Bank of America shares slid 2.6% to $29.05 in trading Tuesday.
Banks are struggling to adapt to the Fed officials' plan to hold interest rates in their current range between 2.25% and 2.5%. The central bank had raised rates in recent years from near zero, but halted the effort following a market swoon in December as it became clear to economists that the stimulus was fading from President Donald Trump's late-2017 tax cuts.
Trump has criticized Fed Chair Jerome Powell, his own appointee to lead the central bank, for raising rates too far and too quickly.
In recent years, investors had hotly anticipated a prolonged cycle of rate increases on the expectation that the banks would be able to charge higher loan rates, while still keeping deposit rates close to zero.
But in the first quarter, Bank of America's average borrowing costs -- on deposits as well as long-term debt -- climbed by 0.12 percentage point to 1.6%, but its average interest charge on assets such as loans and debt securities rose by just 0.08 percentage point to 3.68%.
"They were more prepared for rising rates, and now it's going the other way," said David Hendler, principal at the bank-analysis firm Viola Risk Advisors. "You can't turn on a dime."
The stock tumbled even though Bank of America said first-quarter profit rose by 6% from a year earlier, with earnings per share of 70 cents beating analysts' average estimate of 66 cents.
Bank of America, led by CEO Brian Moynihan, cut expenses by 4%, while revenue of $23 billion was roughly on par with levels reported for the first quarter of 2018.
Despite improvement in the bank's sprawling branch-banking unit, the results were marred by a lackluster trading environment that also weighed on first-quarter profits at the rival Wall Street lenders JPMorgan Chase (JPM - Get Report) , Citigroup (C - Get Report) and Goldman Sachs Group (GS - Get Report) .
Bank of America's stock-trading revenue tumbled 22% to $1.2 billion, while fees and trading profits from bonds, commodities and foreign exchange declined by 8% to $2.4 billion.
Yet revenue jumped 25% to $3.2 billion in Bank of America's mammoth consumer-banking business, which includes more than 4,000 branches.
Average deposits increased by 5% to $1.4 trillion, while average loans in business segments climbed by 4% to $897 billion, according to the bank.
Expenses should remain roughly even with last year's levels, helping to boost profits, executives said on the conference call.
"It was a challenging capital-markets environment but our team and platform are optimized," Moynihan said in a press release.
Moynihan said on the conference call that even with an expected slowdown this year in the economy loan quality remains healthy.
Non-performing assets, including loans more than 90 days past due, averaged 1.23% of total loans, down from 1.25% in the fourth quarter of 2018 and 1.49% a year earlier, according to Gerard Cassidy, an analyst at RBC Capital Markets.
The results were bolstered by "continued expense management and lower credit costs," Cassidy wrote in a note to clients.
The bank also benefited from an effective tax rate of 16.6%, Cassidy wrote. The analyst had estimated a rate of 18.5%, and the official U.S. corporate rate is 21%.