Bank of America's loan growth signals demand is creeping back

UPDATE: This article includes comments from the bank's earnings call and an analyst note.

Many banks have struggled to grow this year, but Bank of America's third-quarter earnings suggest loan demand may be returning.

The rebound is far from convincing, with average loans growing 1% and executives flagging that businesses remain cautious on making big investments. But loan demand ticked up from both small businesses and larger corporates in the third quarter, executives said Tuesday, building on the momentum a quarter earlier.

"I don't know if that's early to call it a streak, but we're obviously pleased to see it," Alastair Borthwick, the Charlotte, North Carolina-based megabank's chief financial officer, told analysts.

Businesses aren't tapping their revolving lines of credit much yet, but that and other loan activity may grow further as interest rates come down in the coming months. The Federal Reserve last month cut interest rates for the first time since the COVID-19 pandemic, and officials are weighing how quickly to lower them again.

Overall economic activity is "fine" even if growth is a bit slower, Bank of America CEO Brian Moynihan told analysts. Consumers are continuing to spend as unemployment remains low and wages keep rising. Some businesses remain cautious and are still feeling the pinch of higher interest rates.

"They aren't being indolent. They want to grow. They are simply being more careful," Moynihan said.

In one sign of vitality, Bank of America's Wall Street operations had strong growth in the third quarter.

Fees in the $3.3 trillion-asset bank's investment and brokerage services jumped 15% from the same quarter a year ago. Sales and trading revenue increased 12%. Investment banking fees gained 18% from a year ago, as more companies turned to debt financing.

All told, Bank of America's fee revenue jumped about 5.5% from a year ago to $11.4 billion.

That helped ease other earnings pressures at the company, whose profits fell about 12% on rising deposit costs.

The company posted a net profit of $6.9 billion, or 81 cents a share, down from $7.8 billion, or 90 cents a share, in the year-ago quarter. Despite the slide, the earnings outperformed analyst estimates of 76 cents per share, according to S&P Capital IQ data.

The profit decline was driven by the rising interest payments Bank of America made to its depositors. Net interest income was about $14 billion in the third quarter, down by about $400 million from a year earlier but up by about $300 million from the second quarter of this year.

Executives highlighted the latter figure as a sign that the NII pressures they've seen are fading, and they said they expect similar-sized growth in NII in the fourth quarter.

Borthwick said NII reached a trough in the second quarter, just as Bank of America had indicated would happen last year. The interest rates that the bank paid to different kinds of depositors, from individuals to multinational corporations, grew at a slower pace than before.

The results point to "greater NII resiliency," Wolfe Research analyst Steven Chubak wrote in a note to clients. That should help relieve some lingering investor concerns over its profitability and recent sales of the bank's stock from legendary investor Warren Buffet, Chubak wrote.

Bank of America's share price was up 1.4% Tuesday afternoon and has gained about 26% for the year to date.

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Noninterest expense climbed 4% from a year ago to $16.5 billion. The bank attributed that to "investments in the franchise" and the higher bonuses it paid to Wall Street-oriented staffers who helped drive up the bank's fee revenue.

The company recently laid out a plan to open 165 more branches by 2026, focusing on U.S. markets where its presence is small. It expects to open 40 branches this year, which includes one opened last month in Louisville, Kentucky.

Megabanks have spent the past decade trimming their branch footprints, but the targeted investments mark a turnaround. JPMorgan Chase and Wells Fargo are also opening new branches in select markets.

The bank also set aside more money to cover potential loan losses, with some $1.5 billion in provisions compared with $1.2 billion a year ago. Charge-offs at about $1.5 billion rose from $931 million a year earlier. The increase was partly driven by consumer credit card losses and commercial real estate loans.

But both categories saw fewer losses compared with the second quarter, Borthwick said Tuesday.

"Asset quality was solid," he said in a news release. "We believe our diverse business is a source of strength, helping us deepen existing client relationships and develop new ones, over time."