Bank of America Posts Mixed Q2 Results Amid Rate Cut Concerns

On Wednesday, Bank of America (BAC) reported mixed second-quarter results. The bank’s profitability beat analysts’ expectation. However, the bank’s revenues, net of interest expenses, were a bit shy. Deposit and lending growth combined with higher short-term interest rates drove Bank of America’s net interest income on a YoY (year-over-over) basis. However, the net interest margin fell by 7 basis points sequentially. The lower net interest margin reflected the low-interest rate, which is a concern.

A high possibility of a rate cut in July is expected to impact banks’ net interest in the coming quarters. Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), and Wells Fargo (WFC) posted better-than-expected second-quarter results. However, JPMorgan Chase and Wells Fargo lowered their net interest income outlook due to the potential rate cut.

Wells Fargo expects its net interest income to fall 5% in 2019. Previously, the company’s management expected a decrease of 2%–5%. JPMorgan Chase lowered its net interest income outlook by $500 million for 2019. Citigroup expects a 25 basis point rate cut to have a negative impact of $50 million quarterly.

We expect rate cuts to hurt Bank of America’s net interest income growth. However, the bank’s ability to grow loans and deposits is expected to support the net interest income.

Bank of America’s revenues, net of interest expenses, were $23.1 billion. The revenues fell marginally short of analysts’ estimate of $23.22 billion. A decline in investment banking fees and loan spread compression in the global banking segment limited the revenue growth rate. However, the revenues rose about 2% on a YoY basis, which reflected the higher net interest income.

The net interest income increased 3% YoY to $12.2 billion. However, the net interest income fell by $0.2 billion sequentially. The total loans and leases increased 2%, while the deposits increased 6%.

The non-interest expenses increased modestly. The higher non-interest expenses reflected the higher wage rate and marketing expenses. However, the bank’s efficiency ratio improved to 57% from 59% in the second quarter of 2018, which is encouraging. The provision for credit losses showed a sequential improvement.

Bank of America posted an EPS of $0.74, which increased 17% on a YoY basis and beat analysts’ estimate of $0.71. The higher net interest income and operating leverage drove the bank’s second-quarter earnings. Share repurchases cushioned Bank of America’s earnings.