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BofA Beats Despite 14% Slump In FICC Revenue; Interest Income Unexpectedly Declines

Echoing the trend set by JPM and Wells Fargo last Friday, moments ago Bank of America reported revenue and earnings that modestly beat expectations, with Q2 revenue of $22.8bn, above the $21.8bn expected, generating net income of $5.3 billion up 10% Y/Y, and EPS of $0.46, above the $0.43 estimate, and 12% higher than Q2 2016.

Net interest income increased 9%, or $0.9B, to $11.0B while investment banking fees rose 9% to $1.5B. BofA achieved this even though its Net Interest Yield (i.e. NIM) unexpectedly declined from 2.39% in Q1 to 2.34% in Q2 as analysts had expected the number to remain unchanged. As the bank explained, "NII was relatively flat from 1Q17, reflecting the benefits from higher short-end rates and one additional interest accrual day, offset by lower NII in Global Markets... Lower Global Markets NII included the impact of higher funding costs associated with balance sheet growth to support client financing activities in equities." Looking forward the bank said "Expect 3Q17 NII to increase from 2Q17,  assuming realization of the forward curve and modest growth in loans and deposits."

BofA also gave the following interest rate sensitivity as of June 30: +/- 100bps parallel shift in interest rate yield curve is estimated to benefit NII by $3.2B over the next 12 months, driven primarily by sensitivity to short-end rates

The bank revealed that its provision for credit losses improved to $726 million from $976 million a year earlier, with net charge-offs of $0.9B declining 3% from 1Q17. The bank noted that "consumer net charge-offs at lowest level in over a decade."

BofA also disclosed a net reserve release of $0.2B in 2Q17, "driven by continued improvements in consumer real estate and energy exposures; net reserve release of $0.1B in 1Q17." Confirming this point, the amount of Consumer loans 30+ days performing past due declined $0.8B from 1Q17. As of Q2, BofA's total allowance for loan and lease losses was $10.9B, or 1.2% of total loans and leases. Finally, the bank said that NPLs decreased from 1Q17 across both consumer and commercial with 43% of consumer NPLs current. While overall the loan quality was good, there was an unexpected jump in commercial net charge offs which rose to a 1+ year high of $157MM or 0.14%. Also notable: in the consumer bank, net charge- offs in the U.S. credit-card book climbed 5.6 percent to $640 million, compared to the first three months of the year. Analysts will likely have questions about what the bank sees happening in that book and what it says about the health of the U.S. consumer.

A snapshot of the bank's consumer banking trends is shown below:

But perhaps the one segment that interested the market the most was how BofA's Markets group performed, and it was here that unlike JPM, BofA surprised to the upside, reporting better than expected results in both FICC, where the bank generated $2.25bn, abnove the $2.22bn expected, and in equities where the bank reported total revenue of $1.12bn, above the $1.05bn expected.  Total Sales and Trading revenue was $3.369BN, beating expectations of a $3.30 billion print. Still, despite the beat, the number was a 9% drop from the "strong" from a year ago. And while FICC declined 14% Y/Y, "due to a weaker performance in rates and emerging markets relative to a strong quarter in the prior year",  equities revenue was up 3% "due to growth in client financing activities, offset by slower secondary markets."

Also notable: VaR declined from $46mm in Q2 2016 to $43mm in Q1 2017.

Finally, there was a notable change in the company's expense highlights, where the bank added 1,000 workers, rising from 43K in Q1 to 44K in Q2 in total sales, and rising by 400 in total to 210,900, even as personnel expenses remained flat Y/Y.

Full presentation below (link)