U.S. bank earnings are under pressure from a low interest regime.
With its lending business failing to offset the impact of consistent low interest rates Bank of America Corp has reported a drop of 19% in its second quarter profits, while setting a new expense target for boosting further growth.
Struggling, like other lenders, under the regime of low interest rates, analysts say the Charlotte, N.C. based bank is particularly sensitive to the issue due to the way its management has positioned its balance sheet. Similarly, accounting oddities linked to interest rates have also dented the bank’s profit during the last quarter.
According to senior executives of the bank, Bank of America is doing everything it can to offset the impact of low interest rates while keeping an eagle eye on costs.
As per Brian Moynihan, the Bank’s Chief executive, a new expense target of $53 billion has been set for 2017-2018. Although previously, the bank did not have an annual expense goal, the current expense target is $3.3 billion short of its total expenses over the last four quarters. This cost cutting measure comes in the wake of the bank adopting a new initiative for pushing efficiency called “Simplify and Improve” under a project dubbed as “New BAC”.
“The question is, can we grow earnings without rates improving?” asked Moynihan. “We believe we surely can.”
Naturally, Bank of America is not alone in its struggle with low interest rates. Its declining profits are mirrored in other banks as well, including, Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase and Co.
Although the U.S. Federal Reserve has started the lifting-off process of interest rates in the U.S., optimism among banks for doing so are wavering especially after Britain’s shock decision of quitting the European Union.
Incidentally, Bank of America is the second-largest bank in the U.S. going by assets. Its 12% decline in net interest income only goes to underscore the climate of low interest rates and the difficulty it brings to bank’s earnings.
However, low interest rates are only part of the story. The bank has also been hurt by its decision to stick to FAS 91, an accounting standard. As per Paul Donofrio, Bank of America’s Chief Financial Officer, the accounting standard affects its earnings from the up and down movement of interest rates.
Due to the adoption of this method by the bank, it was forced to adjust downwards its income by $1 billion during this quarter. However, a year ago, FAS 91 had boosted its earnings. Donofrio has clarified that the bank is considering to switch to another accounting method that better manages the volatility in earnings.
Analysts say the bank’s fundamentals are reasonably strong, given the environment. During a presentation, Bank of America has said its net income in each of its four core businesses have grown, when stripped of accounting adjustments and writing-off of assets.
Trading in its stocks was pretty strong despite Brexit. The bank’s shares closed at $14.11, 3.3% higher than its previous closing.
Adjusted trading revenues rose by 12% to $3.7 billion in the last quarter, while revenues from currency and commodities trading and fixed income, grew by 22%.
“Bank of America’s 2Q results, while noisy, reflected a number of items that surprised positively,” said Steven Chubak an analyst at Nomura.
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