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| Bank of America’s Profit Gains, as Legal Costs Tumble |
Bank
of America Corp. on Tuesday reported its biggest annual profit in
nearly a decade, a sign the second-largest U.S. bank might finally be
putting some of its crisis-era troubles behind it. The bank’s 2015
profit was $15.89 billion, the best result since 2006, when the bank
made more than $21 billion. The profit was also more than twice what
Bank of America had reported in 2014, with much of the improvement
related to a big drop in legal and regulatory fines. Annual revenue
slipped 2%, and some analysts questioned how much the bank would be able
to keep cutting costs, a key tenet of the bank’s strategy for the past
several years, as a lever to higher earnings. Evercore ISI analyst Glenn
Schorr called the financial results “mostly good enough.” Still, the
price of the company’s shares was down in morning trading, even as that
of other big banks rose. Fourth-quarter revenue was flat over the
year in the consumer bank and the unit that includes the investment
bank. Revenue in wealth management slipped 3.5%, and Morgan Stanley
overtook Bank of America’s Merrill Lynch wealth management as the
biggest by revenue for the quarter and the year.
Trading revenue was a
bright spot. While results were down from the third quarter, a theme
common across the industry, trading revenue was up 11% from a year ago.
In the quarter, profit was $3.34 billion, or 28 cents a share. That
compares with $3.05 billion, or 25 cents a share in the same period of
2014. The company beat the 26 cents a share expected by analysts polled
by Thomson Reuters. Adjusted revenue increased 4% to $19.76 billion,
slightly less than the $19.82 billion that analysts had expected. Stocks
at all U.S. banks, including Bank of America, were walloped Friday on
concerns about their exposure to low oil prices and troubles in China.
On a call with reporters on Tuesday, Chief Financial Officer Paul
Donofrio said he wasn’t “in the best position to comment” about the
stock market. “We’re very focused on running the business here and the
markets are going to do what the markets are going to do,” said Mr.
Donofrio, echoing his Citigroup counterpart’s comment on Friday that
“the markets are what the markets are.” The earnings announced on
Tuesday close the door on a year in which Chief Executive Brian Moynihan
had hoped to demonstrate the bank’s earnings power in the absence of
the large legal bills that had characterized much of his tenure.
Although profit did improve, Bank of America endured a number of
stumbles along the way, including a flubbed submission in the Federal
Reserve’s annual stress test and a shareholder battle over whether Mr.
Moynihan should remain chairman of the bank’s board. Mr. Moynihan
ultimately survived both tests but now needs to prove he can knit the
slow-and-steady consumer bank and the hard-charging investment bank into
a single force that can work together to best serve customers.
On
Tuesday’s call with analysts, bank executives fielded multiple
questions about energy lending. Mr. Donofrio said the bank is being
careful to work with creditworthy customers, and he pointed out that the
$21.3 billion energy portfolio is only about 2% of the overall loan
book. “We feel like we have a very good handle on our energy portfolio,”
Mr. Donofrio said. “I’m not sending out any red flags.” Commercial loan
defaults were up $75 million over the quarter, driven by losses in
energy, and the bank set aside an extra $144 million mostly to prepare
for potential future defaults in that portfolio. But Mr. Donofrio also
pointed out that falling oil prices are good news for consumers,
manufacturers and countries like India. “This isn’t all bad news,” Mr.
Donofrio said. Debit and credit card spending was up 4% compared with a
year ago. Mr. Moynihan noted such spending would have been up 5.7% if
gas prices had remained stable, and he took that as a positive sign,
nothing the money could one day be spent on other things. There were
times during the quarter, however, when customers were eager to consume.
Mr. Donofrio said spending on debit cards by the hit a record level of
more than $1 billion on Christmas Eve. Quarterly trading revenue,
excluding an accounting adjustment, rose 11% to $2.65 billion from $2.37
billion a year ago, though that quarter was one of the industry’s
weakest in recent years. Compared with the third quarter, trading
revenue fell 16%. Fourth-quarter expenses were down 2% compared with a
year ago, with the bank cutting costs including marketing,
telecommunications and about 10,000 jobs and 130 branches. For the year,
expenses were down 24%, largely because the bank spent much less on
litigation: $1.2 billion in 2015, compared with $16.4 billion the year
before.
The bank’s expense-cutting goals were helped by the
winding down of the unit that services troubled mortgages. Over the
year, that business cut about 6,000 jobs. Even as the bank cuts costs,
some analysts have questioned if Bank of America cutting the right
costs. Analyst Jim Mitchell of Buckingham Research noted the bank’s
efficiency ratio could be improved. Bank executives said they are
working on it and that they needed to spend on new technology and new
sales professionals. Bank of America’s large portfolio of U.S. mortgages
and other U.S. loans makes it particularly dependent on rising interest
rates, and Mr. Donofrio said that if rates weren’t so low, “this
company would look totally different.” Several one-time items also hurt
earnings, including a U.K. surcharge on banks and Bank of America’s
decision to buy back some securities ahead of schedule. The price of
BofA’s shares fell 5.9% in 2015, worse than the 1.6% drop in the KBW
Nasdaq index of bank stocks. Since the start of 2016, the bank’s shares
are down 16%, along with a broad market decline.
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wsj.com/articles/bank-of-americas-results-improve-1453204588
