BofA profit jumps on cost-cutting; shares climb

Bank of America cost-cutting starting to bear fruit

PUBLISHED : Thursday, 18 July, 2013, 10:57am
UPDATED : Thursday, 18 July, 2013, 10:57am

Bank of America posted a bigger-than-expected 70 per cent jump in quarterly profit on Wednesday, helped by aggressive cost-cutting, as Chief Executive Brian Moynihan’s turnaround efforts showed early signs of paying off.

Revenue rose just 3.5 per cent, lagging increases of 11 per cent at Citigroup Inc and 14 per cent at JPMorgan Chase & Co. But Bank of America cut operating expenses 6 per cent, while expenses grew at JPMorgan and Citigroup.

Bank of America unveiled an initiative in 2011 aimed at saving US$8 billion a year, and by the this year fourth quarter it hopes to have cut costs by US$1.5 billion per quarter. On Wednesday, the bank said it was on track to meet those goals and was ahead of schedule on cutting costs from bad mortgage assets.

The bank’s shares were up 3.3 per cent to US$14.38 in afternoon trading, touching their highest levels since March 2011.

“They’ve made excellent strides at cost control,” said Joe Terril, president of Terril & Co, which manages US$650 million and owns Bank of America shares.

“People are going to be surprised if we can get a little stronger economy, if Bank of America can get these legal and regulatory issues behind them, at the type of revenue and earnings that this bank can show,” he added.

While most of the bank’s businesses generated more income, the revenue picture was mixed. In consumer and small business banking, revenue fell by nearly 1 per cent, while in consumer real estate services, revenue dropped 16 per cent. In retail brokerage and asset management, investment banking and sales and trading, revenue rose.

In April, Moynihan said that with the bank getting expenses and bad assets under control, management would work more on boosting revenue and improving operations. “As the other issues go away, this is what the team has to be focused on,” he said.

Bank of America paid about US$2.5 billion for mortgage lender Countrywide Financial in 2008, at the height of the housing crisis, but since then it has paid and paid again for the company. Analysts estimate Bank of America has lost more than US$40 billion from bad mortgages, litigation, and settlements with regulators linked to Countrywide mortgages.

In a sign of the progress it is making in moving past bad mortgages, Bank of America forecast that its fourth-quarter expenses for what it calls “legacy assets and servicing” would be less than US$2 billion, down from a prior forecast of US$2.1 billion. Such expenses totaled US$2.3 billion in the second quarter.

Net income for common shareholders in the second quarter rose to US$3.57 billion, or 32 cents per share, from US$2.10 billion, or 19 cents per share, a year earlier. Revenue, net of interest expense, climbed to US$22.73 billion from US$21.97 billion.

Analysts, on average, expected earnings of 25 cents per share, according to Thomson Reuters I/B/E/S.

Because bond markets weakened in the second quarter, a portfolio of the bank’s investments, known as the “available for sale portfolio,” generated big losses, adding more than US$4 billion of red ink to the bank’s balance sheet.

Those losses more than offset the bank’s net income, resulting in its net worth, as measured by shareholder equity, falling to US$231.03 billion from US$237.29 billion in the first quarter. Other big banks increased their book value in the latest quarter.

Bank of America’s bond trading business was also hurt by the spike in bond yields. Fixed income, currency, and commodities sales and trading revenue fell by US$296 million to US$2.3 billion, excluding an accounting adjustment.

The bank did not do as well as it would have liked in its mortgage and municipal bond trading books, Chief Financial Officer Bruce Thompson told reporters.

Although bond trading was hurt, equities sales and trading revenue, excluding an adjustment, rose 53 per cent to US$1.2 billion.

Rising interest rates should alleviate pressure on margins, but that trend will take time to offset capital declines from rising yields.

On a conference call with investors, Thompson said it should take about three years for the bank to earn enough net interest income to offset the hit to its capital.

In the meantime, the bank is cutting costs. Operating expenses fell to US$16.02 billion in the second quarter from US$17.05 billion a year earlier.

Net interest margin, a measure of the profitability of its loans, rose to 2.44 per cent from 2.21 per cent.