Bank of America shares fall after low interest rates squeeze second-quarter revenue

Bank of America shares dropped in Wednesday’s premarket after the banking giant posted second-quarter revenue below analysts’ expectations.

Here’s how the bank did:

Earnings: $1.03 a share, including a $2 billion tax benefit. Excluding that one-time gain, EPS of 80 cents a share edged out the 77 cents estimate of analysts surveyed by Refinitiv.

Revenue: $21.6 billion, just under the $21.8 billion estimate.

The company said revenue fell 4% from a year earlier, driven by a 6% drop in net interest income because of lower interest rates. Lower trading revenue and the absence of a $704 million gain a year earlier also hit revenue, the bank said.  

Shares fell 3%.

Bank of America’s results show the impact of falling interest rates on the industry. Banks gather deposits and extend loans; falling interest rates squeeze the margin between what they pay depositors and charge borrowers. The bank’s net interest margin of 1.61% in the quarter was 26 basis points lower than a year earlier and below the 1.67% estimate of analysts surveyed by FactSet.

CFO Paul Donofrio cited the “continued challenge of low interest rates” in the bank’s earnings release. The 10-year Treasury yield broke above 1.75% in March amid the economic comeback, hitting its highest level since the pandemic began. But the benchmark rate has pulled back to around 1.40% as of Tuesday.

While an industrywide decline in trading revenue was expected, given the strong quarter a year ago driven by central banks’ response to the pandemic, Bank of America appears to have underperformed.  

The bank’s fixed income trading operations generated $1.97 billion in revenue, well below the $2.71 billion estimate of analysts surveyed by FactSet. That shortfall was partially made up by the equities division, which produced $1.63 billion in revenue, topping the $1.35 billion estimate.

Like other lenders, Bank of America set aside billions of dollars for credit losses last year, when the industry anticipated a wave of defaults tied to the coronavirus pandemic. Instead, government stimulus programs appear to have prevented most of the feared losses, and banks have begun to release reserves this year.

The lender said that it had a $1.6 billion boost in the second quarter as it released reserves amid an improved U.S. economic outlook.

Still, given the industry’s sluggish loan growth this year, analysts will want to hear CEO Brian Moynihan’s outlook for loans in the second half. The bank said Wednesday that its book of loans grew in the second quarter for the first time since early 2020.

Also Wednesday, Citigroup beats analysts’ estimates for profit, thanks to a $1.1 billion boost from releasing reserves the bank had previously set aside for loan losses.

On Tuesday, JPMorgan Chase and Goldman Sachs posted results that beat expectations, helped by strong revenue from Wall Street advisory activities.  

Shares of Bank of America have climbed 31% this year before Wednesday, exceeding the 16% gain of the S&P 500 Index.