Bank of America Corp. beat analysts’ estimates for second-quarter earnings on Monday, with healthy consumer spending and strong loan demand limiting the hit to its investment banking business.
BofA executives also presented a sunny outlook for consumer spending going forward, allaying fears that decades-high inflation is weighing on consumer spending.
“CREDIT QUALITY IS ALWAYS THERE”
“We have observed from our data that spending remains excellent, deposit balances remain strong, borrowing capacity is still there, credit quality is still there,” Chief Financial Officer Alastair Borthwick said during a call.
The US Federal Reserve has raised interest rates rapidly, in line with its commitment to tackling inflation, which has been high for decades. Although recession risks persist, the move has so far translated into higher profits for banks, which typically thrive in a high interest rate environment.
Bank of America’s net interest income, a metric that measures the difference between interest earned on loans and the amount paid out on deposits, jumped 22%, or $2.2 billion, to 12, $4 billion in the quarter.
The second-largest US bank by assets also released $48 million in reserves in the quarter, down from $2.2 billion a year earlier, leaving BofA’s total loan loss provisions at 500. millions of dollars.
This contrasts with rival banks JPMorgan Chase & Co and Wells Fargo & Co, which increased loss provisions by $428 million and $235 million, respectively, in the quarter.
Shares of Bank of America, which have fallen nearly 28% so far this year, were down slightly in premarket trading.
The company’s profit fell 34% to $5.93 billion, or 73 cents per share, for the quarter ended June 30. On an adjusted basis, BofA earned 78 cents per share, versus estimates of 75 cents per share, according to Refinitiv IBES data.
Wall Street investment bankers, who were at the heart of deals last year, saw activity slump in the first half of 2022 amid financial market volatility, geopolitical tensions and sentiment. of risk that swept markets around the world.
Bank of America’s investment banking fees fell 47% to $1.1 billion in the second quarter.
Revenue, net of interest expense, increased 6% to $22.7 billion.
SPENDING AGAINST INFLATION
The strength of US consumers is being tested by inflation, which is at levels not seen in four decades, but spending trends are still largely holding, bolstering the bank’s earnings.
“Our US consumer customers remained resilient with continued strong deposit balances and spending levels,” said Chief Executive Brian Moynihan.
Spending trends are key indicators of consumer financial health and are closely tied to the performance of BofA’s crown jewel, its consumer banking unit, where revenue rose 12% to $9.1 billion. dollars during the quarter under review.
The bank’s combined credit and debit card spending rose 11% to $220.5 billion from the prior quarter. This figure also increased by 10% year over year.
BofA’s total loans and leases, excluding those in the government’s Paycheck Protection Program, were up 14% year-over-year. This figure was also up 4% from the previous quarter.
However, the Fed’s aggressive shift towards lowering inflation has the outlook for lending at a standstill, as rapidly rising borrowing costs have the potential to hurt demand.