Bank of America (BAC, Financial) has skated past Wall Street’s expectations for the second quarter of 2016 – despite suffering a 20% nosedive in earnings.
The commercial banking giant posted a muddled quarterly report on Monday that saw earnings per share finish at 36 cents before dividends. That easily beat analysts’ expectations of just 33 cents per share – but fell extremely short of the 45 cents a share the bank reported this time last year.
According to CEO Brian Moynihan, that sharp drop in earnings can be pegged on a number of dynamic challenges, including historically low interest rates, a struggling energy sector and geopolitical turmoil.
These challenges are not unique to Bank of America.
Big competitors like Citigroup (C, Financial) and JPMorgan Chase (JPM, Financial) have indicated they are also struggling to make a profit due to the U.S. government’s rock bottom federal funds rate, which has made lending far less profitable.
Many within the industry had been anticipating a rate hike in June. Yet the Fed ultimately axed the proposal due to the severe market turmoil that was unleashed by last month’s "Brexit" vote in the U.K.
As a result, analysts have warned not to expect any material changes to the federal funds rate that has been stifling lending until at least December. Yet with numbers already on the mend at Bank of America, that should not feel like too long a wait.
True enough, it has been a tough year for the North Carolina-based banking giant. Shares have slid almost 20% since the start of 2016, and Moynihan and his team have overseen the closure of more than 100 branches in the last 12 months alone.
But last quarter, the closures slowed to just eight branches. Moreover, Monday’s report did demonstrate several above-average performances across some of the bank’s key business activities.
Bank of America’s fixed income, currencies and commodities (FICC) division posted whopping 22% sales increase off the back of increasing demand for municipal bonds.
And regardless of a shrinking non-interest income due to low service charges, the bank’s consumer banking arm posted a modest revenue increase of $107 million. Shrinking operational expenses associated with branch closures also helped to push consumer income up three percent year over year.
Despite posting some pretty low earnings across 2016, Monday’s report actually revealed a relatively healthy quarter for Bank of America.
"Our responsible growth strategy led to improved customer and client activity and each of our four business segments reported higher earnings than the year-ago quarter," Moynihan said in a statement. "We also moved closer to our longer-term performance targets."
Bearing in mind that trading activity is on the rise across the board, Moynihan also went on to add that he was confident Bank of America would continue to grow its business even without the much-needed boost of a federal interest rate hike.
"We believe we surely can [maintain profitability without an interest rate hike]," he said. "If rates rise, we would expect [net interest income] to grow."
Shares in the bank have risen just over 2% since the publishing of Monday’s quarterly report.
Disclosure: I do not own shares in any of the companies listed within this article.
Start a free 7-day trial of Premium Membership to GuruFocus.
