BAC Bank of America Corporation

By Rachel Louise Ensign 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 17, 2018).

Rising interest rates and a massive tax cut carried Bank of America Corp. to a 33% increase in second-quarter profit, making it the latest big bank to benefit from strong economic conditions.

Quarterly profit at the Charlotte, N.C.-based bank, the second largest in the U.S. by assets, rose to $6.784 billion from $5.106 billion a year earlier. Per share, earnings were 63 cents. Analysts had expected 57 cents a share. Revenue fell to $22.609 billion from $22.829 billion a year earlier, when the bank posted a one-time gain related to the sale of a business. Without that gain, revenue would have risen 3%.

The results marked another quarter during which Chief Executive Brian Moynihan led the bank to solid earnings growth after several rocky years after his tenure began in 2010. The bank's strong results in recent quarters are another sign that many big banks are back in growth mode a decade out from a financial crisis that threatened their existence.

On Friday, JPMorgan Chase & Co. and Citigroup Inc. posted double-digit profit increases for the second quarter. Wells Fargo & Co. stumbled due to a number of one-time charges that dinged earnings as well as a shrinking loan book and lower fees in several of its main businesses.

Bank of America's earnings were "almost all you could have hoped for," wrote Glenn Schorr, a bank analyst at Evercore ISI. Loans grew by 2% from a year earlier, while deposits rose nearly 4%. The lender also cut expenses by 5%. Trading revenue, excluding an accounting adjustment, rose nearly 7% to $3.596 billion from $3.369 billion in the second quarter of last year.

One weak spot was investment-banking fees, which fell 7% from a year earlier.

Bank of America shares rose 4.3% Monday, putting them in positive territory for 2018.

Rising interest rates provided a major lift. Lenders like Bank of America turn a profit on the difference between what they pay on deposits and the rate they collect on loans. In the quarter, the Federal Reserve raised its benchmark rate for a seventh time in three years.

Banks have been able to pocket most of the benefits from the rate increases because customers aren't broadly demanding more interest on their deposits. Overall, Bank of America paid a rate of 0.38% on U.S. interest-bearing deposits in the second quarter, compared with 0.30% in the first quarter. In its retail banking unit, the bank paid a minuscule 0.05%.

Banks are expected to eventually have to pay more interest to keep depositors around, crimping the financial benefit of future rate increases. Bank of America has managed to keep interest costs in check better than many of its rivals, giving it more room to maneuver should consumers begin to demand higher rates.

The recent tax-law changes also provided a major lift. The bank paid $1.71 billion in income tax in the quarter, down 43% from $3.015 billion in the same quarter last year, before the legislation was passed.

The question is whether the good results help change investors' sentiment about bank stocks. After a huge run-up after the 2016 election, investors have shown little enthusiasm for the industry's shares this year. Since the start of 2018, the KBW Nasdaq bank index is roughly flat and trails broader U.S. stock-market benchmarks.

Investors have grown wary of lenders, analysts say, because of a flattening of the yield curve: a narrowing of the difference in the yields of shorter- and longer-term Treasurys.

A flatter yield curve can be bad for banks because they earn less on loans and securities tied to longer-term Treasurys. The narrowing also potentially signals problems ahead for the economy.

"It will have an impact," Bank of America Chief Financial Officer Paul Donofrio said of the yield curve on a Monday call with reporters. However, like many lenders, the bank is more sensitive to shorter-term rates than longer-term ones, which limits the pain from the current curve, he said.

Investors' tepid feelings about bank stocks seemed to shift somewhat on Monday, when shares of the four largest U.S. banks all rose more than 2%.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

(END) Dow Jones Newswires

July 17, 2018 02:47 ET (06:47 GMT)

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