* Profit 32 cents/share vs Street view 25 cents
* Revenue rises 3.5 pct but, unlike rivals, expenses fall
* Shares up 3.3 pct to highest levels since 2011
* Bank's book value drops, hit by bond market weakness
By Peter Rudegeair
July 17 Bank of America Corp posted a
bigger-than-expected 70 percent jump in quarterly profit on
Wednesday, helped by aggressive cost-cutting, as Chief Executive
Brian Moynihan's turnaround efforts showed early signs of paying
Revenue rose just 3.5 percent, lagging increases of 11
percent at Citigroup Inc and 14 percent at JPMorgan Chase
& Co. But Bank of America cut operating expenses 6
percent, while expenses grew at JPMorgan and Citigroup.
Bank of America unveiled an initiative in 2011 aimed at
saving $8 billion a year, and by the 2013 fourth quarter it
hopes to have cut costs by $1.5 billion per quarter. On
Wednesday, the bank said it was on track to meet those goals and
was ahead of schedule on cutting costs from bad mortgage assets.
The bank's shares were up 3.3 percent to $14.38 in afternoon
trading, touching their highest levels since March 2011.
"They've made excellent strides at cost control," said Joe
Terril, president of Terril & Co, which manages $650 million and
owns Bank of America shares.
"People are going to be surprised if we can get a little
stronger economy, if Bank of America can get these legal and
regulatory issues behind them, at the type of revenue and
earnings that this bank can show," he added.
While most of the bank's businesses generated more income,
the revenue picture was mixed. In consumer and small business
banking, revenue fell by nearly 1 percent, while in consumer
real estate services, revenue dropped 16 percent. In retail
brokerage and asset management, investment banking and sales and
trading, revenue rose.
In April, Moynihan said that with the bank getting expenses
and bad assets under control, management would work more on
boosting revenue and improving operations. "As the other issues
go away, this is what the team has to be focused on," he said.
Bank of America paid about $2.5 billion for mortgage lender
Countrywide Financial in 2008, at the height of the housing
crisis, but since then it has paid and paid again for the
company. Analysts estimate Bank of America has lost more than
$40 billion from bad mortgages, litigation, and settlements with
regulators linked to Countrywide mortgages.
In a sign of the progress it is making in moving past bad
mortgages, Bank of America forecast that its fourth-quarter
expenses for what it calls "legacy assets and servicing" would
be less than $2 billion, down from a prior forecast of $2.1
billion. Such expenses totaled $2.3 billion in the second
Net income for common shareholders in the second quarter
rose to $3.57 billion, or 32 cents per share, from $2.10
billion, or 19 cents per share, a year earlier. Revenue, net of
interest expense, climbed to $22.73 billion from $21.97 billion.
Analysts, on average, expected earnings of 25 cents per
share, according to Thomson Reuters I/B/E/S.
HIT TO BOOK VALUE
Because bond markets weakened in the second quarter, a
portfolio of the bank's investments, known as the "available for
sale portfolio," generated big losses, adding more than $4
billion of red ink to the bank's balance sheet.
Those losses more than offset the bank's net income,
resulting in its net worth, as measured by shareholder equity,
falling to $231.03 billion from $237.29 billion in the first
quarter. Other big banks increased their book value in the
Bank of America's bond trading business was also hurt by the
spike in bond yields. Fixed income, currency, and commodities
sales and trading revenue fell by $296 million to $2.3 billion,
excluding an accounting adjustment.
The bank did not do as well as it would have liked in its
mortgage and municipal bond trading books, Chief Financial
Officer Bruce Thompson told reporters.
Although bond trading was hurt, equities sales and trading
revenue, excluding an adjustment, rose 53 percent to $1.2
Rising interest rates should alleviate pressure on margins,
but that trend will take time to offset capital declines from
On a conference call with investors, Thompson said it should
take about three years for the bank to earn enough net interest
income to offset the hit to its capital.
In the meantime, the bank is cutting costs. Operating
expenses fell to $16.02 billion in the second quarter from
$17.05 billion a year earlier.
Net interest margin, a measure of the profitability of its
loans, rose to 2.44 percent from 2.21 percent.