Bank of America gets Wall Street kudos for middling, but unsurprising, earnings

Sergio Flores/Bloomberg

Bank of America delivered what it promised in its second quarter, for better and worse.

The Charlotte, North Carolina-based company reported Tuesday that its second-quarter earnings saw its previously forecast dip in profits and net interest income and a spike in investment banking fees that drove revenue. While the balance sheet showed both positive and negative aspects, the predictability of the report Tuesday was key.

The market rewarded BofA for meeting its previous guidance and beating some expectations by lifting its stock price more than 5% Tuesday, to $44.22 per share in midday trading.

Chief Financial Officer Alastair Borthwick said the bank has been consistent in its expectation that its second quarter this year would be the lowest for interest income, but laid out the bank's growth plans for the second half of 2024.

"What we're trying to do here is reinforce for everyone what we've been saying from the beginning of the year," Borthwick said on a call with analysts. "That is, we think Q2 is a trough, and we believe from this point, we're in a good position to grow ... we feel like 2024 is a really foundational year. It's this twist period where we've just got to get through the last of the deposit rotation, and we're establishing a foundation for growth from here."

Scott Siefers, an analyst at Piper Sandler, wrote in a note that the earnings showed "no real surprises, and the core numbers look better than we had anticipated." The company reported earnings-per-share of $0.83, topping consensus expectations of $0.80.

BofA is facing similar obstacles to other megabanks, as it reckons with the effects of high interest rates, builds up provisions for potentially bad loans and struggles to make new ones. The $3.3 trillion-asset bank is also showing similar strengths as its peers, with investment banking fees surging nearly 30% from the year prior, to $1.6 billion, making up revenue lost from other businesses.

Net interest income — the difference between revenues from loans and securities and interest expenses — fell to $13.7 billion at the bank, down from $14 billion the previous quarter and $14.2 billion in the second quarter of 2023. The drop was largely due to high deposit costs, which shot up in the last year as customers sought stronger returns in the higher rate environment, while meek loan growth hasn't made up the income.

The bank's fall in net interest income also dragged down profits more than 6% from the year prior, to $6.9 billion.

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BofA announced Tuesday that it's forecasting three 25-basis-point interest rate cuts by the Federal Reserve in September, November and December.

With the expected rate cuts, the bank anticipates low single-digit percentage growth in loans and deposits, slower deposit rotation and fixed-rate asset repricing of securities at the bank. BofA is maintaining its net interest income guidance of $14.5 billion for the fourth quarter, which would be an increase of about 5%. CEO Brian Moynihan said the key to improving net interest income is the stabilizing deposit performance and low, but positive loan growth.

Investors were laser-focused on BofA's net interest income trajectory going into Tuesday's earnings, said Piper Sandler's Siefers in an interview. He added that management's guidance for the rest of the year helped address shareholders' concerns.

"It's been a bleed of NII for this company, as it has been for others, so anything that turns this story from one of incremental headwinds to incremental tailwinds, that's a plus," Siefers said.

He added that the bank's plan to boost that income seems viable, but the "wild card" is how much interest rates will actually change.

The slow-and-steady optimization of the bank's balance sheet was a common theme across profitability metrics.

The net interest income low point also put pressure on net interest margin in the second quarter, which was 1.93%, down from 2.06% a year prior. Borthwick said BofA is underearning on NIM — a ratio of net interest income over average earning assets. The CFO said as income from securities and loans ticks up, while assets stay relatively flat, the bank will eventually bring NIM back to around 2.3%.

"That takes a while," Borthwick said. "It's a grind."

BofA returned $5.4 billion to shareholders through dividends and buybacks. During the quarter, the company announced plans for an 8% increase to its quarterly common stock dividend. The bank also increased its common equity tier 1 capital ratio to 11.9%. Its newly assessed regulatory minimum ratio of 10.7%, up from 10%, takes effect on Oct. 1.

Meanwhile, credit performance at the bank was "solid," wrote Citi analyst Keith Horowitz in a note. Similar to peers, BofA's provision for credit losses grew to $1.5 billion, up from $1.1 billion last year, though the pace of growth in net charge-offs has started easing up.

Moynihan said on the analyst call that BofA's earnings highlight its combination of "customer-centric strategies, innovation, strategic investments and a commitment to a strong balance of risk and reward."

"We achieved success in a number of areas, underscoring the benefits of our diversity and the dedication of our team to deliver responsible growth," Moynihan said. "Our organic growth engine continues to add customers and activity to all our businesses, even as we see this drop in net interest income this quarter."