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Weak Trading Hit BofA (BAC) Q1 Earnings, Stock Down

Lower trading revenues as well as a rise in credit costs led Bank of America Corporation’s BAC first-quarter 2016 earnings of 21 cents per share, which lagged the Zacks Consensus Estimate by a penny. Further, the bottom line witnessed a 16% year-over-year decline.
 

 

The results included 7 cents per share of negative market-related net interest income adjustments and 5 cents per share of annual retirement-eligible incentive compensation costs. Excluding these, the company would have earned 33 cents per share.

BofA’s shares fell nearly 2% in pre-market trading. This perhaps reflects the investors’ concerns over a challenging operating backdrop and a continued slump in trading. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.

As expected, weaknesses in equity and fixed income trading revenues, investment banking fees and mortgage banking revenue were the headwinds for BofA. Further, a jump in provisions owing to energy sector exposure added to the concerns.

Though BofA was able to mitigate these undermining factors (to some extent) through expense control, absence of legal costs and higher card fees, these were not sufficient to support the bottom line.

Nonetheless, reduced long-term debt, attributable to maturities and improved funding costs, also featured among the positives.

Further, overall performance of the company’s business segments, in terms of net income generation, was decent. All segments, other than Global Wealth and Investment Management, Global Banking, and Legacy Assets and Servicing, witnessed improvement in net income.

Details

Net revenue amounted to $19.5 billion, down 7% from $20.9 billion recorded in the prior-year quarter. Also, the top line missed the Zacks Consensus Estimate of $20.5 billion.

Net interest income, on a fully taxable-equivalent basis, fell 2% year over year to $9.4 billion. Further, net interest yield declined 11 basis points (bps) year over year to 2.05%.

Non-interest income decreased 10% year over year to $10.3 billion.

Non-interest expense was $14.8 billion, decreasing 6% year over year. The decline reflected lower revenue-related incentives, progress made on LAS expenses and the expiration of fully amortized advisor retention awards.

The company’s book value per share as of Mar 31, 2016 was $23.12, compared with $21.66 as of Mar 31, 2015. Tangible book value per share as of Mar 31, 2016 was $16.17, up from $14.79 as of Mar 31, 2015.

As of Mar 31, 2016, the company’s common equity tier 1 capital ratio (Basel 3 Transition) was 10.3%.

Credit Quality

Credit quality saw mixed results during the quarter. As of Mar 31, 2016, ratio of nonperforming loans, leases and foreclosed properties was 1.04%, down 36 bps year over year. Further, net charge-offs decreased 11% to $1,068 million.

Also, provision for credit losses surged 30% year over year to $997 million. The rise was due to increased reserves in the commercial portfolio as a result of energy sector exposure and lower level of reserve releases compared with the prior-year quarter.

Our Viewpoint

The year began on a pessimistic note for BofA and other financial companies. The first two months witnessed huge sell-offs amid plunging oil and commodity prices, Chinese economic slowdown and uncertainty about the timing of the Fed’s next rate hike. Though the markets recovered moderately in March, it wasn’t enough to offset declines of the prior months.

All these factors had an adverse impact on BofA’s performance in the recently concluded quarter. Further, similar concerns are expected to put strain on the company’s revenues in the near-term as well. However, BofA’s efforts to realign its balance sheet, focusing on core operations and prudent cost management will likely support bottom line growth.

Currently, BofA carries a Zacks Rank #5 (Strong Sell).

Among other Wall Street banks, JPMorgan Chase & Co. JPM has already come out with its results, while Wells Fargo & Co. WFC is announcing its result today. Citigroup Inc. C will come up with its results on Apr 15.

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