Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

It must be nice for Bank of America Corp. Chairman and CEO Brian Moynihan to enjoy some bragging rights for a change, but he shouldn't get too comfortable.

Rising interest rates combined with strong performances from investment banking and trading lifted Bank of America's earnings well above estimates. The Charlotte, North Carolina-based lender's success stands in contrast to Goldman Sachs Group Inc., which raised eyebrows on Tuesday by posting results that fell short of Wall Street's expectations, and follows years of lagging performance that had made its stock a perennial under-achiever. 

Shine Bright
Bank of America had the best first quarter of the largest U.S. banks that have reported to date, thanks to higher net interest income spurred by rising rates
Source: Bloomberg

The bank got a a welcome assist from the Federal Reserve, whose changed stance on interest rates -- including two hikes since December -- has helped fatten lending margins. While the bank can charge borrowers more, Bank of America isn't increasing the interest it pays to customers on their deposits. The lender said it intends to remain "disciplined" in this practice and even if customers aren't seeing the benefits of rate hikes, the bank doesn't expect them to hunt around for a rival in which to park their cash. That's partly because a large portion are somewhat stuck with Bank of America-linked mortgages, car payments and other regular transactions -- or what the lender likes to call a "deep relationship." 

Still, Bank of America can't afford to simply to ride on the wings of rising rates while managing its expenses. To buck slowing loan growth, Bank of America should consider selectively investing in areas such as its vehicle-lending business, where net charge-offs -- or the  loans on which it could face losses -- are just 0.38 percentage point, lower even than JPMorgan's at half a percentage point. 

Slowing
Bank of America's loans and leases balance grew by less than 1 percent in the 12 months since March 2016, less than the industry average
Source: Bloomberg Intelligence, Federal Reserve

If Bank of America can maintain the current momentum, it will inch closer toward achieving key profitability measures, including a targeted 12 percent return on tangible common equity.

Within Reach
Thanks to rising rates, Bank of America is close to reaching one of its key profitability targets
Source: Company filings
*Adjusted figure indicates what the ROTCE would have been if a $1.4 billion expense was evenly spread throughout the year.

Doing so -- or even resetting that higher -- will help it close the gap with rivals Wells Fargo & Co. and JPMorgan Chase & Co.. The duo last week posted first-quarter results that included return on tangible common equity figures of 13.85 percent and 13 percent, respectively, which allow them to trade at premium valuations to Bank of America. 

Where To From Here?
On a measure of price to tangible book value, Bank of America has trailed its two larger rivals because of its comparatively poorer profitability
Source: Bloomberg

Still, after a stellar first quarter and estimates for $150 million in additional net interest income in the second quarter thanks to higher rates, long-suffering Bank of America investors are seeing their patience pay off.  Moynihan should keep in mind, though, that now that they've got a taste for winning, they'll expect more of the same.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Some analysts and investors had been hopeful that $150 million figure would be even higher.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net