Bank of America interest yield disappoints even after Fed rate rises

Bank of America has become the latest lender to benefit less than expected from rising interest rates, even as stronger revenues from its retail banking business offset a slowdown in Wall Street bond trading.

The country’s second-biggest bank by assets, which is seen as especially sensitive to interest rates, on Tuesday disclosed net income of $5.3bn for the second quarter, up 10 per cent from a year ago.

BofA had a boost from the Federal Reserve’s tightening of monetary policy, which is allowing banks to charge borrowers higher interest rates while keeping offers for depositors little changed.

The net interest yield, a measure of lending profitability that in the post-crisis era of rock bottom rates has been near the lowest levels in about 60 years, rose from 2.23 per cent a year ago to 2.34 per cent. That helped total revenues rise 7 per cent to $22.8bn.

However, the margin ticked down from 2.39 per cent in the first quarter and was shy of analyst forecasts — a reminder of the challenges facing the banking industry in spite of hopes of a more friendly economic environment.

Paul Donofrio, chief financial officer, highlighted that longer term interest rates — as determined by capital markets — came under pressure during the second quarter. This hurts the income that banks derive from their investments in bonds and mortgage-backed securities.

He also cited what he called “transient” factors for the margin compression, including the disposal of MBNA, the UK credit card business.

BofA’s results marked the latest disappointment in the US bank earning season. On Friday, rival JPMorgan Chase cautioned that its net interest income for this year would be at least $500m less than it had expected.

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Like rivals on Wall Street, BofA’s capital markets business suffered from a recent quiet period in the market that has led to a dearth of trading among clients.

The second quarter decline, however, was not as steep as that suffered by Goldman Sachs. Sales and trading revenue fell 9 per cent to $3.4bn, including a 14 per cent drop in fixed income, currencies and commodities.

Brian Moynihan, chairman and chief executive, said that “against modest economic growth of 2 per cent” the bank overall “had one of the strongest quarters in our history”.

Shares in BofA were down 1.3 per cent by lunchtime in New York. They had leapt 42 per cent since Donald Trump’s election in November. The stock is the best performing among the big six US banks over the period and, for the first time since 2008, it trades at the same level as the bank’s book value, a sign investors are becoming more optimistic after years of post-crisis underperformance.

The results come after the Fed last month gave BofA the green light to return capital equating to $16.6bn over the next year, according to RBC Capital Markets, which is more than double the year before.