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Bank of America Beats: Earnings Rise 7.3% On Rebound In Capital Markets, Expense Cuts

The last big bank to report Q3 earnings in a 48 hour flurry of bank reports was Bank of America, which moments ago announced that it had earned $0.41 in the third quarter, above the $0.34 expected, driven by $21.6 bilion in revenue, which also beat estimates of $20.8 billion, higher by $600 million compared to a year ago period, as a result of a strong rebound in global market earnings which jumped by 34% from $800 million to $1.1 billion as well as a 22% increase in Global Banking from $1.3 billion to $1.55 billion.

Overall, the bank, the second largest in the U.S. by assets, reported a profit of $4.96 billion, up over 7% compared to $4.62 billion in Q3 2015.  Shares reacted promptly rising just shy of 2% on the reported earnings.

As has been the case with other banks, global markets staged a substantial rebound, in no small part aided by the deterioration at Deutsche Bank as counterparties took their business elsewhere. Revenue in the bank’s Global Markets group increased 20% from 3Q15, driven primarily by improved sales and trading results as well as higher capital markets IB fees.

  • Sales and trading revenue of $3.6B, up 14% from 3Q15; FICC up 32% to $2.6B and Equities down 17% to $1.0B
  • FICC revenue increased $0.8B, or 39%, from 3Q15, due to stronger performance globally across credit products led by mortgages as well as continued strength in rates products and client financing
  • Equities revenue decreased $0.2B, or 17%, from 3Q15, due to lower levels of client activity in cash and derivatives, reflecting lower market volatility
  • Noninterest expense decreased 1% versus 3Q15 as higher revenue-related compensation was more than offset by lower operating and support costs

Helping the bottom line was contuing expense management, as a result of a decline in total Full Time equivalent employees declining from 211,000 to 209,000. Expenses declined 3.3% to $13.48 billion, from $13.94 billion a year ago. CEO Moynihan has made cost cutting a key tenet of his business strategy, and over the summer he promised to cut another $5 billion in annual expenses by 2018. To get to that level, the bank would need to turn in expenses averaging $13.25 billion a quarter.

Total noninterest expense of $13.5B in 3Q16 declined $0.5B, or 3%, from 3Q15, driven by improvements in mortgage servicing costs and broad-based reductions in operating and support costs. Expense was relatively flat versus 2Q16 as general expenseimprovement was mostly offset by an expected increase in FDIC expense. Personnel costs declined 2% from 3Q15, reflecting lower staffing levels, partially offset by higher revenue-related incentive compensation.

Among the core metrics, while loans rose by less than $2 billion sequentially in Q3, deposits jumped by nearly $17 billion.

Looking at the loan book, BofA reported that total net charge-offs declined $97MM from 2Q16, “due to improvements in both consumer and commercial.” Net charge-off ratio declined 4bps from 2Q16 to 0.40%; Provision expense of $850MM declined $126MM from 2Q16, driven primarily by commercial. The bank also benefited from a reserve release of $38MM in 3Q16 versus $9MM in 2Q16, while the allowance for loan and lease losses of $11.7B; represents 1.30% of total loans and leases.

Not surprisingly, the bank’s primary source of profit, the Net Interest Income, remained pressured, at $10.2 billion in, largely unchanged from Q3 2015 and Q2 2016, as a result of a net interest yield that was unchanged on the quarter. NII increased $0.1B from 2Q16, due primarily to one additional interest accrual day and lower funding costs, partially offset by lower average long-end rates


Overall, a strong quarter for the bank, where neither the loan writedown troubles of Q1 and Q2, nor the sharp drop in trading observed in H1 was present, while a more stable market environment coupled with ongoing layoffs pushed both the top and bottom line to beat reduced expectations.

Full Q3 eearnings presentation below