CEO Morning Brief

BofA's Profit Drops on Rising Provisions, But Beats Estimates as Investment Banking Surges

Publish date: Wed, 17 Apr 2024, 09:20 AM
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TheEdge CEO Morning Brief
Shifting expectations for US interest rate cuts and an uncertain economic outlook have made it more difficult to predict future profits, banking executives said last week. (Photo by Reuters)

BENGALURU/NEW YORK (April 16): Bank of America (BofA) reported a drop in first-quarter profit, as the lender set aside more money to cover souring loans, but still beat estimates on surging investment banking fees.

A resilient US economy, buoyant equities and a flurry of large deals have reignited hopes of a nascent economic recovery, although industry executives have expressed guarded optimism.

Investment banking fees jumped 35% to US$1.6 billion (RM7.67 billion) for the reported quarter from a year earlier, partially offsetting a decline in interest payments. Last month, chief financial officer Alastair Borthwick said he expected investment banking revenue to jump 10% to 15% in the first quarter.

Revenue from the segment also rose at rival JPMorgan Chase and Citigroup in the first quarter, fuelled by gains in debt and equity capital markets.

Excluding one-off items, BofA earned 83 cents a share in the quarter ended March, sailing past analysts' average estimate of 76 cents a share, according to LSEG data.

Its sales and trading revenue rose 2% to US$5.2 billion, with equities contributing a 15% jump and fixed income currencies and commodities posting a 4% decline.

"BofA's sales and trading businesses continued their strong 2023 momentum this quarter, reporting the best first quarter in over a decade," chief executive officer Brian Moynihan said.

Meanwhile, the bank set aside US$1.3 billion in provisions in the first quarter, up from US$931 million a year ago.

Shifting expectations for US interest rate cuts and an uncertain economic outlook have made it more difficult to predict future profits, banking executives said last week.

If the Federal Reserve (Fed) keeps rates higher for longer in the coming months, lenders that made bumper profits from rising interest rates in the last two years could build on their gains. But their earnings could diminish if a potential economic slowdown deters borrowers from taking out loans.

Revenue from BofA's consumer unit sank 5% to US$10 billion in the quarter, primarily due to lower deposit balances.

Net charge-offs, or debts that are unlikely to be recovered, rose to US$1.5 billion from US$807 million a year earlier, mainly from higher credit card losses.

BofA is among the large lenders, including rival JPMorgan, that are weighing the potential for the Fed to cut interest rates this year. The move could crimp banks' income from interest payments, but could potentially spur economic activity and borrower demand.

BofA's net interest income, the difference between what it earns on loans and pays for deposits, slid 3% to US$14 billion in the quarter due to higher deposit costs and modest loan growth.

BofA also took a US$700 million charge in the reported quarter to replenish a government deposit insurance fund, drained by US$16 billion to cover depositors of two banks that collapsed in 2023.

Profit from BofA's Merrill wealth management division rose about 10% to US$1 billion, as rising equity values generated higher fees with record revenue and client balances.

The division grew assets under management to US$1.4 trillion from US$1.3 trillion in the fourth quarter.

Source: TheEdge - 17 Apr 2024

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