July 14 – Bank of America Corp. (BAC.N) Shares fell on Wednesday after the second-largest US lender detailed its sensitivity to low interest rates and the Federal Reserve said it had no plans to raise its base rate anytime soon.
Its shares fell 5% at noon.
Analysts believe Bank of America is the most exposed to interest rates among the major US banks. Management has changed strategies several times to work better, but rate changes have been nearly impossible to predict for over a decade as politicians have responded to various crises since 2008, including the coronavirus pandemic that began last year.
Although Bank of America’s second-quarter net income rose 173% to nearly $ 9 billion from the previous year, beating analysts’ estimates, net interest income fell more than 6%.
Management offered a higher profit projection if demand for loans rises or interest rates rise gently. Analysts are skeptical about what will happen in the near future.
“BofA really needs a rate hike,” said Evercore ISI analyst Glenn Schorr.
Bank of America CEO Brian Moynihan and CFO Paul Donofrio drew attention to the positive trends in conversations with reporters and analysts.
According to them, the demand for loans began to rise, which will help Bank of America make more money on deposits. Bank of America’s customer credit card and bank account statistics show that consumers are spending more, they added.
Donofrio touted Bank of America’s ability to maintain a relatively stable net interest income, even as rates plummeted and demand for loans fell during the pandemic. According to him, the bank relies on credit growth in order to reach the required level, instead of trying to invest taking into account the direction of interest rates.
“We are not traders or a hedge fund,” Donofrio said. “We use our excess liquidity wisely over time and we always balance our liquidity needs.”
To date, Bank of America’s average loan portfolio grew 0.02% in the second quarter compared to the prior period and 12% lower than a year earlier.
His deposits rose 14% to $ 1.9 trillion.
In its investment portfolio, Bank of America nearly doubled the amount of debt securities on its balance sheet from June 2020 to June 2021, to $ 940 billion from $ 472 billion, according to its financial statements. The fair value of his Treasury and US-backed bonds has tripled over that time.
Bank of America’s investments in US Treasury bonds and debt securities more than tripled.
According to Donofrio, the bank has added risks to secured loan commitments (CLOs), which it underwrites and which have high credit ratings, rather than distributing them to investors. These securities tend to have higher yields than Treasuries and other low-risk assets.
Overall, the bank generated $ 8.96 billion, or $ 1.03 a share, in quarterly earnings, up from $ 3.28 billion, or 37 cents a share, a year earlier.
Analysts had expected an average of 77 cents per share, according to Refinitiv IBES data.
Net revenue fell 4% to $ 21.5 billion.
Net interest income fell 6% to $ 10.2 billion from $ 10.8 billion.
This figure shows the difference between what banks charge for loans and pay for financing.
The Federal Reserve has begun discussions about cutting its easy money policy, and policymakers have put forward their forecasts for interest rate hikes to 2023 from 2024.
However, in prepared testimony for a hearing in Congress on Wednesday, Fed Chairman Jerome Powell indicated that such moves will not happen any time soon. [nL1N2OQ0ZD]
“We hope the Fed is right about inflation,” Donofrio said during a telephone conversation with reporters.
Reporting by Niket Nishant in Bangalore and Elizabeth Dilts Marshall in New York, Additional reporting by Yoruk Bahceli; Edited by Somyadeb Chakrabarti and Andrea Ricci
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