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BofA Beats Despite 22% Plunge in FICC Revenue, Credit Loss Provision Jumps 15%

Courtesy of ZeroHedge. View original post here.

Mirroring the pattern set by JPM and Citi yesterday, Bank of America reported revenue and earnings that modestly beat expectations, with Q3 revenue of $21.8BN and $22.1BN on an adjusted, FTE basis, just above the $21.9BN consensus estimate, generating net income of $5.6 billion (up 13% Y/Y), and EPS of $0.48, above the $0.46 estimate, and higher than the $0.41 reported Y/Y, even as sales and trading revenues slumped, and FICC revenue tumbled by 19%.

Net interest income increased 9% for the second consecutive quarter, or $1.0B, to $11.4B. BofA achieved this as its Net Interest Yield (i.e. NIM) rose fractionally from 2.34% in Q2 to 2.36% in Q3, a number just barely higher than the 2.35% expected. As the bank explained,the Net Interest Income increased "reflecting the benefits from higher short-end interest rates, loan growth and one additional interest accrual day, partially offset by higher deposit pricing in GWIM and the full quarter impact from the sale of the non-U.S. consumer credit card business."

BofA also gave the following interest rate sensitivity as of Sept 30: "+100bps parallel shift in interest rate yield curve is estimated to benefit NII by $3.2B over the next 12 months, driven primarily by sensitivity to short-end interest rates."

With everyone looking at trends in loan quality, BofA revealed that just like JPM and Citi, its provision for credit losses jumped 15% to $834 million from $726 million in the previous quarter, with net charge-offs of $900 million effectively unchanged from Q2 17. That said, this number was modestly better than the $915 million expected. The bank explained that that "Provision expense of $0.8B increased $0.1B from 2Q17, due primarily to credit card portfolio seasoning and loan growth, partially offset by improvements in consumer real estate and reductions in energy exposures." In other words, the same credit card growing pains we noted yesterday, which have seen charge off rates spike to the highest in 4 years.

Furthermore, BofA also revealed that in its consumer banking division, the provision for credit losses increased $269 million, "driven primarily by credit card seasoning and loan growth. Net reserve increase of $167 million vs. release of $12 million"

BofA also disclosed that the net reserve release was $66 million, compared to $182 million in the prior quarter and $38 million in the year-ago quarter. The Q3-17 net reserve release was driven by "continued improvements in consumer real estate and energy exposures, partially offset by seasoning in the U.S. credit card portfolio and loan growth."

What is odd here is that even as BofA's consumer net charge offs declined, the banks was taking a provision for further credit card losses, suggesting that it expects further consumer credit card weakness in the quarters months to come.  Also notable is that the Consumer loans 30+ days performing past due rose sharply by $0.6BN from 2Q17, to $9.244BN.

In light of these data, analysts will likely have more questions about what the bank sees happening in its consumer loan book and what it says about the health of the U.S. consumer.

A snapshot of the bank's consumer banking trends is shown below:

But the one segment that interested the market the most was how BofA's Markets group performed, and it was here that just like JPM, and Citi, BofA showed a steep decline, reporting another drop in equity and fixed income sales and trading, even if these were on par with expectations, to wit:

3Q Equities Trading revenue of $984M, just shy of the est. $985.8M and modestly higher from $960M a year ago. The big slump was once again in the bank's FICC division, where revenues tumbled 22% from $2.767BN to $2.166BN, fractionally better than the $2.15BN expected.

And while FICC tumbled due to "less favorable market conditions across credit-related products, as well as lower volatility in rates products", the same exact excuse used by JPM and Citi, equity revenues increased by 2% "reflecting growth in client financing activities, partially offset by slower secondary market activity."

Also notable: Average trading-related assets increased from 3Q16, due primarily to targeted growth in client-financing activities in Equities; average VaR was relatively flat at $41MM in 3Q17

Finally, there was a notable change in the company's expense highlights, where the bank reversed all the hires it made in Q2, and then some, as BofA cut more than 1000 jobs during the quarter, as it reduced its headcount below 210K, or 209,839 to be precise, for the first time since the financial crisis. This helped the bank keep compensation expenses lower during the quarter as well as personnel costs dropped to $7.48 billion, which was lower than the $7.58 billion analysts had expected.

Full presentation below (link)


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