After Friday's earnings reports from JPM and Citi suggested that, unlike most hedge funds, banks profited handsomely from the surge in Q1 volatility, this morning's results from BofA confirmed that yet another bank enjoyed bumper revenue in equity trading in the first quarter at the expense of FICC, even as the bank's generally favorable balance sheet trends persisted.
The big picture: BofA reported adjusted Q1 revenue of $23.27BN, just above the $23.1BN expected, generating EPS of $0.62, also beating consensus estimates of $0.59.
Commenting on the results, CEO Brian Moynihan said that BofA’s "strong client activity, coupled with a growing global economy and solid U.S. consumer activity, led to record quarterly earnings."
Then, going straight to the slide in the earnings presentation that all will focus on - Global Markets - BofA reported Q1 sales and trading revenue excluding DVA of $4.117 billion, just missing the consensus estimate of $4.14 billion. Just like with JPM and Citi, BofA too saw a dramatic surge in Equity sales and trading revenues, which soared from $1.1BN in Q1 2017 to a record $1.517BN, smashing estimates of $1.18BN.
This is what the bank said:
Record Equities revenue of $1.5B increased 38% from 1Q17, driven by increased client activity and a strong trading performance in derivatives
That was the good news: the bad is that just like with JPM, FICC disappointed, printing at $2.5 billion (ex DVA), down 13% Y/Y, "due to lower activity and less favorable market conditions in credit-related products, partially offset by improved activity in rates and currencies", and well below the estimate of $2.96 billion.
Another disappointment: 1Q investment banking revenue tumbled 15% Y/Y to $1.35 billion, also below the estimate of $1.48 billion.
To sum up: FICC sales and trading missed, but was almost exactly offset by the rebound in Equities S&T, even as investment banking revenue slumped in a quarter that saw few marquee M&A or bond and equity issuance deals.
Some other trading highlights:
- Average total assets increased from 1Q17, primarily due to targeted growth in both Equities and FICC
- Average VaR remained low at $40MM in 1Q18
Last but not least, BofA was proud to announce it had no trading loss days recorded in the first quarter.
Stepping away from trading, where BofA surprised is that unlike Wells, its loan book continued to grow, and total loans and leases rose by $4BN sequentially, and 2% Y/Y, even as total deposits hit a new record high of $1.297TN, up 3% Y/Y. Of note: consumer banking average loans/leases of $280BN increased $22BN, or 8%, y/y driven by growth in residential mortgage, credit card debt; meanwhile Q1 average loan balances in business segments rose $45BN, or 5%, to $864BN.
Looking at the bank's asset quality, total net charge-offs of $0.9B declined $0.3B from 4Q17, while total net charge-off ratio improved to 40 bps. As the company notes, the overall credit quality "remained strong across both the consumer and commercial portfolios," leading to the drop in net charge-offs while the provision for credit losses remained stable at $834MM.
BofA also explains that commercial net charge-offs of $0.1B decreased $0.4B, "primarily driven by the absence of a $0.3B single-name non-U.S. charge-off in 4Q17", which as a reminder was the bank's exposure to Steinhoff debt, which plunged overnight in late Q4.
Meanwhile, the bank's net reserve release decreased to $77MM from $99MM Y/Y, driven by continued improvements in consumer real estate, energy exposures, partially offset by continued seasoning in U.S. Card portfolio.
And speaking of said "seasoning" one can see the deteriorating trend in credit card charge-offs in the chart below, something we saw previously with JPM:
Another notable observation: whereas JPM saw its NIM increase, and Wells Fargo's net interest income slumped, BofA's remained perfectly unchanged at 2.39%, which however missed fractionally the estimate of a rise to 2.40%. According to BofA, its NIM "reflects the benefits from spread improvement offset by a reduction in the non-U.S. consumer credit card portfolio (higher-yielding asset), as well as the impact from an increase in Global Markets assets (lower-yielding)."
The bank also notes that a +100bps parallel shift in interest rate yield curve is estimated to benefit NII by $3.0B over the next 12 months, driven primarily by sensitivity to short-end interest rates. BofA did not explain how much it would be hurt by the continued sharp flattening of the yield curve.
Finally, on the expense side, BofA recorded Q1 compensation expenses $8.48 billion, above the estimate of $8.28 billion. At the same time, total noninterest expense of $13.9B declined $196MM, or 1% Y/Y, driven by lower non-personnel costs; this helped the total efficiency ratio to improve to 60% in 1Q18.
Overall, a good quarter if nothing spectacular for BofA, which like all other banks benefited from the surge in vol, which helped boost equity trading revenue to record highs, even as FICC and i-Banking declined sharply. Meanwhile, the bank continued to create loans if at a slower pace, while continued curve flattening threatens to further pressure the bank's NIM.
Full earnings below (pdf link).