Bank of America profit rises on higher rates, lower costs

The lender's large stock of deposits and rate-sensitive mortgage securities make it well placed to benefit from rate rises

Bank of America (BofA) beat expectations with a 15 per cent rise in third-quarter profit on Friday as the second-largest US lender kept a tight leash on costs and benefited from higher interest rates.

Chief Executive Brian Moynihan’s years-long effort to streamline the bank’s sprawling operations and keep its costs in check are finally bearing fruit as the Federal Reserve raises borrowing costs.

The lender’s large stock of deposits and rate-sensitive mortgage securities make it especially well placed to benefit from rate rises. Its third-quarter earnings performance beat rivals JPMorgan Chase & Co and Citigroup, which reported gains of 7.1 per cent and 7.6 per cent, respectively on Wednesday.

“On balance, Bank of America’s results stack up better than those of peers,” Instinet analyst Steven Chubak said.

The Federal Reserve’s three rate increases since December boosted Bank of America’s net interest income 9.4 per cent to $11.16 billion and the central bank is widely expected to raise rates again in December.
 

The improved fortunes at BofA, which spent years in the doghouse dealing with fines and settlements arising from the financial crisis, contrasts with the 19 per cent profit decline Wells Fargo & Co reported on Friday due to mortgage issues stemming from 2007-09.

Bank of America’s shares, which had risen nearly 16 per cent year to date, were up almost one per cent in morning trade while Wells Fargo was down more than three per cent.

Provisions for credit losses rose 15 per cent from the second quarter, driven by credit cards and loan growth and analysts pressed the bank’s executives about possible signs of problems with consumer credit. Citigroup and JPMorgan said they expect to charge-off more for bad card loans in the future.

“We’re just not seeing it yet in our net charge-offs,” Chief Financial Officer Paul Donofrio told the analysts. He said that was true for auto loans, as well as card loans, and could be due to the bank’s shift after the financial crisis to focus on lending to customers with prime and superprime credit scores.

Similar to rivals, trading revenue at the Charlotte, North Carolina-based lender fell 15 per cent, with revenue from fixed income trading down 22 per cent.