Bank of America Slides After Trading Revenue Slump, $2.2 Billion Reserve Release Saves The Day

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by Tyler Durden
Wednesday, Jul 14, 2021 - 07:50 AM

The bank earnings parade continued on Wednesday morning when Bank of America reported disappointing earnings that missed on the top line as a result of disappointing trading revenue like JPM yesterday with FICC sliding 38% Y/Y due to "more benign markets in 2Q21" and badly missing expectations ($1.9BN vs Exp. $2.4BN), but also like JPM beat on the bottom line thanks to an overly generous reserve release.

The result in a nutshell:

  • Revenue net of interest expense $21.47 billion, down -3.9% y/y, and missing the estimate of $21.84 billion
  • EPS $1.03 vs. 37c y/y, beating the estimate 77c, and coming above the highest Wall Street forecast of 88c

However, unlike JPM which at least reported solid Net Interest Income, BofA was unable to and missed on NII which came in at $10.34BN, below the $10.44BN estimate, hit by lower rates, and down 6% Y/Y while flat sequentially.

Adding insult to injury, the Bank's Net Margin Income dropped to a new record low.

Non-interest income was also down, about 2%, because of the weakness in sales and trading and the absence of a $704 million gain that it had during last year’s period.

The bank also returned $6 billion this quarter in common dividends and share repurchases, and expects to return an even greater amount in coming quarters, according to Donofrio.

Commenting on the quarter, CEO Brian Moynihan said "we delivered solid earnings and returned more capital to shareholders during the quarter as we moved to a more open economy. Our team continued to do a great job serving clients, as shown by increased levels of client activity across all our businesses.” Predictably, he was cheerful on the economy saying that “consumer spending has significantly surpassed pre-pandemic levels, deposit growth is strong, and loan levels have begun to grow.”

While BofA's Reserve Release was not quite as massive as JPM it was still huge at $2.2BN, and with $0.6BN in charge offs, the bank's benefit from credit losses was a whopping $1.6BN. Excluding this kicker to the bottom line, the bank would have likely missed on the bottom line.

The result summarized:

Looking at the all important Markets group, things were suboptimal, with the bank beating on equities trading (like JPM) but missing on FICC (also like JPM) to wit:

  • Trading Revenue Ex. DVA $3.60B, down 19% Est. $3.78B
  • Equities Trading Rev. Ex-DVA $1.63B, up 33% Y/Y, and beating the est. $1.34B
  • FICC Trading Rev. Ex-DVA $1.97B, down 38% Y/Y, and missing the Est. $2.44B
  • Investment Banking Rev. $2.12B

Commenting on the results, BofA said that excluding net DVA, sales and trading revenue of $3.6B decreased19% from 2Q203

  • FICC revenue of $2.0B decreased 38%, as the prior year benefited from a robust trading environment for macro products and strengthening markets for credit products after their pandemic related sell-off, whereas markets were more benign in 2Q21 and weak for agency mortgages

One common theme from the 2nd quarter earnings season is the sharp drop in FICC. This is how the all important for Wall Street FICC segment stacks up at the three banks

  • JPMorgan: $4.1 billion, a 44% decline
  • Goldman: $2.32 billion, a 40% decline
  • BofA: $1.9 billion a 38% decline.

Separately, equities revenue of $1.6B increased 33%, driven by a stronger trading performance and increased client activity in derivatives and Asia

Meanwhile on the expense side, non-interest expense of $3.5B rose 29% vs. 2Q20, driven by higher costs associated with processing state unemployment benefit claims and activity-related expenses in sales and trading

Away from trading, BofA's Investment banking had a pretty solid quarter just like Goldman, with total fees in that business of $2.1 billion.  The bank notes those fees remained at near record levels.

CFO Paul Donofrio, also commented on loan balances, which grew for the first time since the first quarter of 2020, despite the bank recording the lowest credit loss rates in 25 years, he said.

That said, as Bloomberg notes, Bank of America is struggling to build back its lending income as consumers, flush with cash from government stimulus programs, avoid taking on new borrowings.

While government aid programs during the pandemic have helped big lenders like Bank of America dodge widespread defaults, they’ve also meant many consumers and businesses haven’t needed to take on new loans or tap lines of credit. That trend, along with rock-bottom interest rates meant to stimulate the economy, has weighed on the profitability of banks’ core lending businesses.

In kneejerk response, Bank of America shares dropped as much as 3.4% in pre-market trading Wednesday, after reporting second-quarter trading revenues that missed analyst expectations.

Full Investor presentation below (pdf link)

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