Bank of America's Third Quarter Trading Results Surpass Expectations Despite Net Interest Yield Reaching Cycle Lows and Charge-Offs Reaching an 11-Year High
This morning, Bank of America joined Goldman Sachs in reporting better than expected Q3 earnings. Despite receiving Warren Buffett's disapproval, as the billionaire investor dumped much of his shares, the bank performed better than anticipated. It benefited from volatile markets and its net interest income exceeded analysts’ estimates. However, there were also several red flags. The company's Net Interest Yield slid to a cycle low, even as charge-offs and credit losses jumped to their highest in years.
Bank of America's Q3 Report
Here's a quick look at what Bank of America reported in Q3:
- Revenue net of interest expense was $25.35 billion, surpassing the estimated $25.27 billion.
- Trading revenue excluding DVA was $4.94 billion, beating the estimated $4.57 billion.
- FICC trading revenue excluding DVA was $2.94 billion, beating the estimated $2.77 billion.
- Equities trading revenue excluding DVA was $2.00 billion, beating the estimated $1.81 billion.
- Investment banking revenue was $1.40 billion, beating the estimated $1.24 billion.
- Wealth & investment management total revenue was $5.76 billion, beating the estimated $5.63 billion.
- EPS was $0.81, beating estimates of $0.77.
Global Markets Group
In the Global Markets group, revenue from equity and fixed income, currencies, and commodities trading rose 12% to $4.93 billion in the third quarter. FICC revenue increased 8%, to $2.9BN, beating estimates of $2.8BN. This was primarily driven by improved client activity and trading performance in currencies and interest rate products. Equities revenue increased 18%, to $2.0BN, beating estimates of $1.8BN. This was driven by strong client activity and trading performance in cash and derivatives.
Investment Banking
Like Goldman, Bank of America's investment banking also outperformed expectations, indicating that the long-awaited rebound in dealmaking is taking hold. The company benefited from “year-over-year growth in investment banking and asset management fees, as well as sales and trading revenue,” CEO Brian Moynihan said in the statement.
Investment-banking revenue rose 15% to $1.40Bn, better than analysts expected amid renewed strength in dealmaking. Fees for advising on mergers and acquisitions fell 14%, less than the almost 24% decline analysts had expected. Revenue from equity and debt issuance increased 16% and 37%, respectively.
Net Interest Income and Credit Losses
However, not all was positive. The second-largest US bank reported that net interest income, a key source of revenue for the company, fell 2.9% to $14 billion, the lowest of the cycle. Still, this was better than the 3.4% drop analysts had expected. BofA's net interest yield came in at 1.92%, down both sequentially and YOY, and just below the estimated 1.93%.
Additionally, BofA's provision for credit losses unexpectedly rose to the highest in years, reaching $1.54 billion in Q3, higher than the $1.53 billion estimates. Charge-offs also rose to $1.534 billion, above the $1.5 billion estimate and a 0.58% charge-off ratio.
Balance Sheet and Shares
Looking at the balance sheet, loans were at $1.08 trillion, slightly higher than the estimated $1.07 trillion. Total deposits were $1.93 trillion, meeting the estimated $1.93 trillion.
Shares of Bank of America, which gained 24% this year through Monday, climbed 1.4%. However, they were well off session highs, and it is expected to close red as investors override the euphoria algo kneejerk reaction.
Bottom Line
Despite some red flags, Bank of America's Q3 trading results surpassed expectations. However, the bank's net interest yield reached cycle lows and charge-offs hit an 11-year high. It will be interesting to see how these factors will impact the bank's performance in the future. What are your thoughts on these results? Feel free to share this article with your friends. And don't forget, you can sign up for the Daily Briefing, which is every day at 6 pm.
Bank of America's Third Quarter Trading Results Surpass Expectations Despite Net Interest Yield Reaching Cycle Lows and Charge-Offs Reaching an 11-Year High
This morning, Bank of America joined Goldman Sachs in reporting better than expected Q3 earnings. Despite receiving Warren Buffett's disapproval, as the billionaire investor dumped much of his shares, the bank performed better than anticipated. It benefited from volatile markets and its net interest income exceeded analysts’ estimates. However, there were also several red flags. The company's Net Interest Yield slid to a cycle low, even as charge-offs and credit losses jumped to their highest in years.
