Bank of America's Bragging Rights Come With an Assist
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.
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.
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.
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.
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. 1 Moynihan should keep in mind, though, that now that they've got a taste for winning, they'll expect more of the same.
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