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Wells Fargo set another profit record in the second quarter, but analysts wonder how long the streak can continue.
July 12 -
The largest U.S. bank's forecast of a steep decline in mortgage volume and continued regulatory uncertainty raised alarm bells about the whole industry. Possible growth in credit cards offered a ray of hope.
July 12 -
The long-anticipated collapse in mortgage applications, finally a reality, stands to take a bite out of bank earnings in the second quarter and beyond.
July 10 -
Click on individual bank names in the table below to access American Banker's coverage of each company's earnings report.
July 31
With refinancings falling off a cliff, Bank of America (BAC) faces a much tougher road expanding its share of the mortgage market and competing against rivals Wells Fargo (WFC) and JPMorgan Chase (JPM).
On a conference call with analysts Wednesday, B of A's chief financial officer, Bruce Thompson, tried to make the case that the Charlotte, N.C., bank could rebuild its market share in a rising rate environment even though 83% of loans funded in the second quarter were refis and just 17% were loans to buy homes.
Thompson said B of A now has a 5% market share of originations. "We believe we can, over time, grow that market share from 4% a year ago to the high single digits."
Meanwhile, Chief Executive Brian Moynihan tried to make the case that the addition of 800 mortgage loan officers in bank branches would do the trick.
"We now have more than half the mortgage officers working in the branches, in the stores and that business system is really taking hold," he said. "We have to make that transition happen."
But the transition from refis to home purchases will be a tough one considering that all the large banks are competing more on price, which is cutting into margins as refinancings plummet.
"B of A is aggressively moving back into mortgages and maybe they missed out a little bit by not being as aggressive as Wells Fargo," says Erik Oja, a bank analyst at S&P Capital IQ. "They've made a big bet on mortgages and staffed for it, and they expect a big increase in the third quarter."
To be sure, mortgage lending accounts for just 5.5% of B of A's overall revenue, compared with 13% for Wells and 6% for JPMorgan Chase.
Paul Miller, a managing director at FBR Capital Markets, said he was surprised at how confident Moynihan and Thompson were that market share would rise.
"I do not know how they get to 10% market share in a non-refi market," Miller says. "They think they can do it overnight and it's a tough racket to get into. They have proven not to be able to do it in the past and while building retail will mean higher profits, it carries a lot of fixed costs."
Still, investors lauded B of A's overall results, driving shares up 2% to $14.19 a share.
B of A's second-quarter profits jumped 63% from a year earlier to $4 billion. Earnings of 32 cents a share handily beat analysts' average estimates of 25 cents a share. Revenue rose 3% in the quarter to $22.9 billion.
"Profits were very strong this quarter and the share price reflects the feeling that the turnaround really is in place," says Oja. "This is one of the best quarters they've had post-crisis."
Analysts attributed the strong quarterly results to improved credit quality, expense reductions and the continued release of loan loss reserves.
B of A's loan-loss provision fell 32% to $1.2 billion from a year earlier its lowest provision in five years. Total expenses of $16 billion were down 18% from the first quarter due to a decline in litigation expenses and lower costs for servicing delinquent loans. Overall expenses fell to 72% of net revenue the lowest level in years, Oja says.
"Revenue was solid, costs came down significantly, and credit continues to improve," Thompson told analysts.
Oja notes "a lot of positives in the quarter" particularly a 20% jump in commercial loan growth to $381 billion, growth in auto loans and a more stable U.S. credit card portfolio. B of A's net interest margin was 2.44% in the second quarter, up from 2.43% in the first quarter and 2.21% a year earlier. Net interest income rose 13% to $10.8 billion from a year earlier.
"They have much better control on legacy costs, which are coming down, so the real concern really comes down to net interest income growth and sustainability," Oja says
Oja expects profits likely will fall in the second half though B of A's full-year results should be strong with a projected $12.2 billion in net income, up from $4.2 billion in 2012.
The problem is that a significant chunk of earnings growth for B of A continues to come from the
Pretax reserve releases this year will be roughly $3.7 billion, down from $9.6 billion last year, he projects. In the past four years, B of A has released $25 billion in reserves while profits in the period were about $8.9 billion, Oja says.
"Reserve releases have played an outsized role, which is why the reaction of investors today is not that strong despite very, very good results," he says. "It's a reserve-release story."
B of A expects quarterly expenses for its legacy loans to be below $2 billion from now on, but it has proven overly optimistic on that front before. A number of unknowns remain, including the outcome of a June trial disputing
When asked Wednesday whether reserves set aside for the settlement were enough or could go higher, Thompson demurred.
"To speculate or comment is not appropriate," he said.
