News report

Low interest rates reduce income

Bank of America stocks fell ahead of market Wednesday after the banking giant posted second-quarter income below analysts’ expectations.

Here’s how the bank did it:

Earnings: $ 1.03 per share, including a tax benefit of $ 2 billion. Excluding this one-time gain, EPS of 80 cents per share exceeded the estimate of 77 cents of analysts polled by Refinitiv.

Returned: $ 21.6 billion, slightly less than the estimate of $ 21.8 billion.

The company said its revenue fell 4% from the previous year, due to a 6% drop in net interest income due to falling interest rates. Falling trading income and the lack of a gain of $ 704 million a year earlier also affected income, the bank said.

The shares fell 3%.

Bank of America results show the impact of lower interest rates on the industry. Banks collect deposits and grant loans; falling interest rates reduce the margin between what they pay depositors and what they charge borrowers. The bank’s net interest margin of 1.61% in the quarter was 26 basis points lower than a year earlier and lower than the estimate of 1.67% by analysts polled by FactSet.

CFO Paul Donofrio cited the “continued challenge of low interest rates” in the bank’s earnings release. The 10-year Treasury yield surpassed 1.75% in March amid the economic recovery, hitting its highest level since the start of the pandemic. But the benchmark rate fell to around 1.40% on Tuesday.

While an industry-wide drop in trading revenue was expected, given a good quarter a year ago driven by central banks’ response to the pandemic, Bank of America appears to have underperformed.

The bank’s fixed-income trading operations generated $ 1.97 billion in revenue, well below the estimate of $ 2.71 billion by analysts polled by FactSet. This shortfall was partially filled by the equity division, which generated revenue of $ 1.63 billion, exceeding the estimate of $ 1.35 billion.

Like other lenders, Bank of America set aside billions of dollars for credit losses last year, when the industry anticipated a wave of defaults linked to the coronavirus pandemic. Instead, government stimulus packages appear to have averted most of the feared losses, and banks have started releasing reserves this year.

The lender said it received a boost of $ 1.6 billion in the second quarter as it released reserves amid improving U.S. economic prospects.

Still, given the industry’s weak lending growth this year, analysts will want to hear CEO Brian Moynihan’s outlook for second-half lending. The bank said on Wednesday its loan portfolio increased in the second quarter for the first time since early 2020.

Wednesday also, Citigroup beats analyst earnings estimates, thanks to a boost of $ 1.1 billion from the release of reserves the bank had previously set aside for loan losses.

Tuesday, JPMorgan Chase and Goldman Sachs performed better than expected, helped by strong revenues from the Wall Street advisory business.

Shares of Bank of America climbed 31% this year before Wednesday, beating the 16% gain in the S&P 500 index.

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