Bank of America Corp posted better-than-expected first-quarter earnings on Thursday in the latest sign that the No. 2 U.S. bank is moving past the mortgage troubles that have hobbled it since the financial crisis.
The lender, like rivals including JPMorgan Chase & Co and Wells Fargo & Co, made more U.S. corporate loans. It also earned more from trading, excluding an accounting adjustment.
Bank of America, based in Charlotte, North Carolina, was among the hardest hit of the major U.S. banks, but has been on the mend. It passed the Federal Reserve's latest stress test in March, shifting investor concerns from its capital needs to its ability to increase earnings in a time of low interest rates and increased regulation.
Boosting earnings may be tough for Bank of America. Revenue dropped again in its signature consumer banking business, which has been crimped by new regulations. Total loans fell by about 3 percent as decreased consumer lending overshadowed growth in loans to businesses.
The bank set aside less money to cover bad loans than it has in any quarter since 2007. Sales and trading revenue, excluding an accounting charge, was the third highest since the 2009 acquisition of Merrill Lynch.
Bank of America shares rose as much as 2.7 percent, but they declined with the broader market and ended down 1.7 percent at $8.77. The stock is up about 58 percent this year after falling the same amount in 2011.
Bank of America's first-quarter net income was $653 million, or 3 cents a share, down from $2.05 billion, or 17 cents per share, a year earlier.
The bank reported charges of $4.8 billion related to changes in the value of its debt, partially offset by gains of $2.8 billion from equity investments and debt-related transactions.
Excluding debt valuation adjustments, earnings were 31 cents a share.
Analysts' average estimate was 12 cents per share, according to Thomson Reuters I/B/E/S. The bank said analysts typically do not include debt valuation adjustments in their estimates.
Total revenue, which included the accounting adjustments, declined to $22.3 billion from $26.9 billion. The bank took a loan-loss provision of $2.4 billion, compared with $3.8 billion a year ago.
In its capital markets operations, Bank of America reported sales and trading revenue of $3.8 billion, up from $1.5 billion in the fourth quarter but down from $4.6 billion a year ago. Excluding the debt valuation adjustment, sales and trading was up slightly from a year ago.
The bank saw particular strength in its fixed-income trading operations as worries about the European debt crisis decreased. The improved performance came even as the bank held less risky assets compared with a year ago.
Morgan Stanley also on Thursday reported better-than-expected results, helped by strong trading revenue.
Bank of America's tier 1 common equity ratio, comparing its core equity capital to its risk-weighted assets, rose to 10.78 percent under current rules from 9.68 percent in the fourth quarter as it issued shares to employees, shed assets and accumulated earnings.
Chief Financial Officer Bruce Thompson said in a conference call with analysts that the bank expects to have a Tier 1 common equity ratio of more than 7.5 percent by year end under future capital standards -- so-called Basel III rules. The bank's previous estimate was 7.25 percent to 7.5 percent.
Under rules that are still being finalized, big banks will likely need to get to around 9.5 percent by 2019, although many expect to get there much sooner.
"They continue to show they are accelerating the pace to get to that number," said Marty Mosby, an analyst with Guggenheim Partners.
How fast Bank of America gets there will depend on how much more the bank ends up spending on mortgage-related lawsuits and losses, largely tied to its 2008 purchase of Countrywide Financial, Mosby said. He estimated those after-tax losses could range from $15 billion to $40 billion.
Profits were up in the bank's five business units from the previous quarter, but revenue in the consumer and business banking unit continued to trend down.
Thompson said credit card loans declined for seasonal reasons and that a decline in home-equity loans was intentional, as the bank looked to shed riskier real estate-related assets. "We feel we have a good base to start growing from," he said.
With revenue harder to come by, Bank of America Chief Executive Brian Moynihan is looking to cut costs to boost profits. Last year the bank launched an efficiency program called Project New BAC that is expected to eliminate 30,000 jobs in consumer and technology areas over the next few years and reduce annual expenses by $5 billion.
In Thursday's conference call with analysts, Thompson said the bank expects to wrap up plans for the second phase of New BAC in May. That segment, focusing on capital markets, wealth management and commercial banking, is expected to produce a smaller reduction in expenses and jobs because these businesses are more efficient and have fewer employees.
First-quarter expenses fell 5.6 percent to $19.1 billion.
In addition to cutting jobs, the bank has said it plans to shed 750 branches over the next few years. Total banking centers declined by about 50 to 5,651. The bank could look to sell some branches in low-performing markets, Moynihan said on the call.
Moynihan and Thompson declined to comment on the possible sale of its wealth management units outside the United States. Reuters reported this week that the bank hopes to bring in up to $3 billion from the sale.
(Reporting By Rick Rothacker in Charlotte, North Carolina; Additional reporting by Ilaina Jonas; Editing Maureen Bavdek and John Wallace)