Bank of America is bracing for more pressure from lower interest rates.
The $2.4 trillion-asset bank’s quarterly earnings took a hit after three rate cuts in the second half of 2019. But those cuts are expected to create bigger revenue challenges in the first half of this year by offsetting loan growth, crimping yields and squeezing margins.
Net interest income, which fell by 3% from a year earlier despite an additional $36.5 billion in loans, will continue to decline in the next two quarters, executives warned during a Wednesday call to discuss financial results.
That will challenge the Charlotte, N.C., company to find ways to grow without taking on excessive risk.
“How do you run a company, a big bank and deal with lower rates?” Brian Moynihan, the company’s chairman and CEO, said on the call.
“We drive what we can control with our commitment to responsible growth,” he added. “We drive more loans, more deposits, more assets under management … with the right pricing and at the right risks. We also have to manage our cost base carefully while making required investments.”
Bank of America was one of several large banks to report lower quarterly revenue, reporting a 1.5% decline, to $22.5 billion. U.S. Bancorp and Wells Fargo also reported lower quarterly revenue from a year earlier.
At Bank of America, the net interest margin contracted by 6 basis points, to 2.35%.
Lower reinvestment rates will likely bring securities yields down in the first quarter, said Paul Donofrio, BofA’s chief financial officer. Seasonal factors such as paydowns of credit card balances after holiday spending, could add pressure in the second quarter.
The company’s 2020 net interest income could wind up “modestly” short of last year’s $48.9 billion, assuming the economy remains solid and the rate environment stabilizes, Donofrio said.
Gains in the consumer business are a critical component of the outlook. BofA also expects to be in position to lower deposit prices over the second of the 2020.
Waning consumer loan demand, or another rate cut, could quickly cloud that forecast, industry observers said.
“It really is hard to predict what comes next on rates, but I think it is going to be a difficult run” for net interest income, said Robert Bolton, president of Iron Bay Capital.
Among the biggest U.S. banks, Bank of America has the most exposure to shifting rates because of its massive deposit base — $720 billion in its consumer bank — and relatively large dealings in rate-sensitive mortgage securities.
Given its national footprint, BofA is a bellwether for U.S. retail banking. Analysts had forecast that lower rates would hamper the company’s fourth-quarter margin, and its 2020 outlook reinforces concerns about the banking industry’s ability to boost revenue with their balance sheets.
“Low rates are keeping consumers active in terms of credit demand, but it’s a tough time for yields,” said Damon DelMonte, an analyst at Keefe, Bruyette & Woods.
While overall profit fell by 4% to $7 billion, earnings per share of 74 cents topped the average estimate of analysts polled by FactSet by 6 cents.
Net income in the consumer division decreased by nearly 10%, to $3.1 billion, reflecting the drop in interest income.
Aside from rate pressure, Moynihan told analysts that BofA finished 2019 with substantial momentum bringing in loans and deposits, adding that he is generally optimistic about the operating environment and balance sheet growth in 2020.
Consumer loans rose by 7%, commercial credits increased by 6% and average deposit balances were 5% higher than a year earlier.
With unemployment hovering around historic lows, consumer confidence remains high entering 2020. Business owners also received an important dose of certainty with news that the U.S. and China had reached a trade deal.
“Today, we see some resolution of those issues and that, combined with the continued consumer strength, leads us to expect to see businesses continue their solid activity,” Moynihan said. “We're hearing more optimism.”
