The second-largest bank in terms of assets in the U.S., Bank of America (BAC, Financial), reported its first-quarter fiscal earnings on April 15 and left investors confused upon their immediate reaction to the results which portrayed a mixed performance by the bank having diversified operations. While the first quarter earnings surpassed the Street expectations, the revenue fell short of meeting the analysts’ expectations. Let’s quickly take a glance at the earnings report and decipher the major highlights from the first quarter report of the fiscal year 2015.
The quarter at a glance
The bank was able to report firm profits in the quarter much above the expectations of the investors as it reported net income of $3.4 billion, which was much above the $276 million loss reported by Bank of America in the same quarter last year. Adjusted earnings were at $0.36 a share well above the $0.29 a share being expected by the Street. However, the top line was severely hit by low interest rates which diminished the net interest income earned by the bank during the quarter. Such factors that negatively affected its revenue were much beyond the control of the bank which has diversified its operations to generate better returns for its investors.
Revenue for the quarter was at $21.2 billion from $22.77 billion reported a year ago. In fact, the Street’s expectations on revenue of $21.51 billion were missed by a slight margin. Let’s introspect further to understand how the operating segments performed during the quarter.
Segmental review showcases better performance
Both the Consumer Banking and Global Banking segment performed well during the quarter. The Consumer banking section’s deposit balances jumped almost 5% to $531.4 billion while the brokerage assets climbed 18% to $118.5 billion. It is notable that the bank was able to grow its total client assets which crossed the $2.5 trillion mark in the first quarter of the fiscal year. The bank also issued 1.2 million new credit cards in the quarter which refers to its enhancement of the client base during the quarter.
The bank’s Global banking business generated $1.5 billion in investment banking fees and it marked the highest quarterly advisor fee revenue earned by the bank since its merger with Merrill Lynch during the financial crisis. The wealth management division generated $4.5 billion in revenue in the first quarter, and represented about 22% of the bank’s total revenue for the quarter. However, the low interest rate served as a major headwind for the quarter leading to shrinking net interest margin figure that fell to a record low of 2.17% compared to 2.29%, a year earlier. The interest income of the bank stood at $9.7 billion, the lowest level seen by the bank since the economic downturn in 2008.
Cost-cutting initiatives and lower legal expenses led to savings
The first quarter operating expenses dropped by almost 18%, the largest dip since the first quarter of 2012. It is an impressive start to the fiscal year when we consider the legal expenses which were brought down to about $400 million, when compared to the litigation expenses of $6 billion incurred in the same quarter a year ago. This appears to be a silver lining for the bank that has been facing huge legal settlements in the past few years since the financial crisis in 2008 for which there was a constant drain-out of billions of dollars in the past which led to depressed margins and profits. But, finally shareholders have some news to rejoice upon – the huge legal expenses seem to have got over and that is well reflected in the whopping decrease in legal expenses during the first quarter.
In fact, the drop in legal expenses by such a huge margin attributed to the jump in profits during the quarter.
Last word
Hopefully, after the Federal Reserve hikes the interest rate later this year, the bank will see better topline and bottom-line pouring into its kitty. As on date, Bank of America’s first quarter earnings were a mixed set of numbers and the management remains optimistic on the upcoming quarter which is well reflected in the words of CEO, Brian Moynihan: “We see continued encouraging signs in customer and client activity with consumer spending increasing and utilization of credit by our commercial customers rising. This should bode well for the near-term economic outlook…” So let’s stay tuned for the upcoming quarter results to assess whether this stream of profits continues into the near future.
