BofA’s Merrill Unit Sputters as Moynihan Reduces RiskHugh Son and Donal Griffin
Bank of America Corp.’s first-quarter revenue from fixed-income trading slumped more than most of its peers, eroding the biggest source of profit at the firm’s Merrill Lynch investment bank amid a push to curtail risk.
Fixed-income, currency and commodity revenue reported yesterday by the Charlotte, North Carolina-based lender tumbled 20 percent to $3.3 billion from a year earlier while total trading revenue fell 13 percent to $4.5 billion in the quarter, missing the $5 billion estimate of David Trone, an analyst with JMP Securities LLC. Among the five biggest U.S. investment banks, only Morgan Stanley’s fixed-income sales fell more.
Chief Executive Officer Brian T. Moynihan, 53, has relied on investment-banking units overseen by former Goldman Sachs Group Inc. trading head Thomas K. Montag to generate income while booking more than $40 billion in costs from defective mortgages. Moynihan is focused on lowering risk, improving capital and regaining regulators’ trust, which could mean Bank of America will lag behind rivals on trading, said Eric Wasserstrom, an analyst at SunTrust Robinson Humphrey Inc.
“Given those priorities, there’s very little incentive for them to take outsized trading risks,” said Wasserstrom, who has a neutral rating on the bank’s shares. “Their absolute levels of trading revenue may be lower than peers.”
Moynihan told analysts yesterday he was comfortable with the trading unit’s performance because the division took less risk and lowered expenses. Bank of America’s value-at-risk, a measure of potential trading losses on most days, fell to $80.5 million from $84 million in the year-earlier quarter.
“There will be times when people do better than we are and times when we’ll do better than them, but we’re keeping a balance,” Moynihan said. “We may not roar as much as some other people might because this is one of many businesses we have, and we drive it for the benefit of the investing customers and also the issuing customers.”
Results were also hurt by “less-favorable markets” for commodities and “significantly lower spreads” in credit-related products, the bank said. The spread is the extra yield that investors demand to own a bond rather than Treasuries. Jerry Dubrowski, a company spokesman, declined to comment.
Fixed-income revenue fell 5 percent to $4.75 billion at JPMorgan Chase & Co., 9 percent to $3.26 billion at Goldman Sachs and 3 percent to $4.62 billion at Citigroup Inc. The three firms cited declines in their so-called rates businesses. Rates traders buy and sell products including Treasuries, inflation-protected bonds and interest-rate swaps.
Citigroup benefited from trading mortgage-related products as investors sought out securities with higher yields, Chief Financial Officer John Gerspach told reporters. For all four firms, results were the best since the first quarter of 2012, as revenue was helped by a higher volume in corporate bonds and declining credit spreads in high-yield debt, Trone said.
Morgan Stanley’s fixed-income revenue plunged 42 percent to $1.52 billion, the New York-based bank said today. The firm, led by CEO James Gorman, is the smallest fixed-income trader among the five biggest U.S. investment banks.
Bank of America, the second-biggest U.S. lender by assets, fell 4.7 percent yesterday in New York trading, the worst drop in the Dow Jones Industrial Average and the firm’s biggest decline since November. Income at the markets division fell 20 percent to $1.39 billion, while profit from investment and corporate banking slipped 15 percent to $1.34 billion as the unit’s provision for credit losses increased.
The real-estate division posted a loss that widened to $1.3 billion from $1.1 billion a year earlier as expenses climbed 4.5 percent to $4.06 billion and margins narrowed.
During the years immediately after the financial crisis, “Merrill was the only thing that was working as the commercial bank was getting pummeled by real-estate losses,” said David Knutson, a credit analyst with Legal & General Investment Management America.
Bank of America’s Merrill Lynch units may provide a smaller slice of the firm’s income when retail businesses fully recover as restrictions on proprietary trading and other rules in the Dodd-Frank Act could restrain profit, he said.
“Moynihan recognizes that there are regulatory changes coming and that Merrill may not have as meaningful a revenue contribution in the future,” Knutson said. “His view is that it’s going to be a large commercial bank with an investment bank to facilitate large commercial customers, instead of an investment bank that will go out and seek risk on its own.”
Montag, who is co-chief operating officer, got a 21 percent raise to $14.5 million for 2012, marking the third straight year he earned more money than Moynihan. The CEO earned $12 million for the year, a raise of more than 70 percent from 2011.
Regulators might prefer Moynihan because he isn’t associated with investment banking, Knutson said. Bank of America repaid $45 billion in U.S. bailout funds in 2009 after losses tied to the Merrill Lynch and Countrywide Financial Corp. takeovers.
“Moynihan may not make as much money as Montag, but regulators are happy to have him in that chair,” Knutson said. “Moynihan represents more of a business banker, a commercial banker. Their near-death experience is still fresh in regulators’ and the board’s mind.”