Bank of America’s 2Q Earnings Will Benefit From Higher Trading Revenue, Says CEO

Bank of America CEO Brian Moynihan expects the bank's trading revenue to climb in the second quarter. Image source: Bank of America.

Given that the Federal Reserve most likely won't raise interest rates this month as a result of last Friday's dismal jobs report, it's tempting to think that Bank of America's (BAC 0.09%) second-quarter earnings will be just as disappointing as its first-quarter performance. In my opinion, however, there's at least one reason to believe that things will turn out better than expected.

I'm referring to Bank of America's trading revenue. If you think back to the first quarter, this was one of the reasons why the bank's earnings fell by 14% compared to the year-ago period.

Due to concerns about low energy prices, waning economic growth in China, and the United Kingdom's announcement that it will allow voters to decide whether the country stays in the European Union, market volatility rose in the first three months of the year. This led institutional investors to stay on the sidelines, which reduced trading commissions for banks with Wall Street operations, including Bank of America, JPMorgan Chase (JPM 0.56%), and Citigroup (C 1.77%).

For its part, Bank of America saw trading revenues fall 16% on a year-over-year basis. In the first quarter of 2015, it earned $3.9 billion in sales and trading revenue. But fast forward to the first quarter of this year, and the figure came in at only $3.3 billion.

Data source: First-quarter earnings releases.

Bank of America was hit particularly hard in its fixed-income, currency, and commodities trading division, where revenues fell by 17%. The results, according to the bank's earnings release, reflected "a weak trading environment for credit-related products and lower revenues in currencies compared with a strong year-ago quarter, partially offset by an improved performance in rates and client financing."

Its smaller equities trading unit saw sales and trading revenue fall by 11%. Bank of America attributed this to "a weaker trading performance in a challenging market environment."

The results were in line with those at JPMorgan Chase and Citigroup. Earlier in the first quarter, JPMorgan Chase had predicted that trading revenue could be down by as much as 20%. When all was said and done, however, the nation's biggest bank by assets saw the figure drop by a more palatable 11%. Citigroup turned in a similar performance, reporting that its trading unit experienced a 13% drop in income from trading.

The good news is that all three of these banks have already hinted that these trends are on the mend. At a recent industry conference, Bank of America CEO Brian Moynihan said that he feels good about trading revenue. He predicted a mid-single-digit, year-over-year revenue gain.

The head of JPMorgan Chase's investment bank, Daniel Pinto, echoed this sentiment, saying that its trading revenue should climb by the mid-teens. And Citigroup's CEO Michael Corbat followed suit, forecasting a slight uptick.

Thus, while it seems clear that banks and bank investors will have to wait for at least another month (and probably longer) for the Fed to make a move on interest rates, which would boost banks' profits and share prices, there are also reasons to think that the second quarter may nevertheless turn out just fine.