If you're a current or prospective investor in Bank of America (BAC 3.38%), one of the most important things you should probably know is how the nation's second-biggest bank by assets makes money. The answer to this question seems obvious, but there's more to it than meets the eye.
To start out with, as a bank, Bank of America takes deposits and lends out money, pocketing the difference between its cost of funds and its yield on earning assets. In the first quarter of this year, it generated $11.1 billion worth of so-called net interest income.
|
Metric |
Q1 2017 |
|---|---|
|
Net interest income |
$11.1 billion |
|
Noninterest income |
$11.2 billion |
|
Net revenue |
$22.3 billion |
Data source: Bank of America.
But that equates to only 50% of Bank of America's net revenue. The rest comes from a variety of noninterest income sources -- things like credit card interchange income, account maintenance and overdraft fees, and investment banking revenue, among other things.
Bank of America is a universal bank, meaning that it runs both investment and commercial banking businesses, as well as one of the world's largest wealth management companies, Merrill Lynch. This is why Bank of America's single largest source of noninterest income in the first three months of this year stemmed from fees for investment and brokerage services, which added up to $3.3 billion. After that came $2.3 billion in trading account profits, which fall under its investment bank.
Another way to think about how Bank of America makes money is to break its revenue and earnings down by operating segment, which is what the North Carolina-based bank has done for investors in the presentation that accompanied its latest quarterly earnings report:
Image source: Bank of America.
As you can see, Bank of America's consumer banking unit generates the largest share of the overall company's earnings, at $1.9 billion in the three months ended March 31. This was followed by its global banking unit, with $1.7 billion worth of net income. And its global markets and wealth management units came in at $1.3 billion and $800 million, respectively, in the first quarter.
The one issue with analyzing Bank of America's earnings stream by business units, however, is that it tends to record large losses in its administrative "all other" unit -- an $800 million loss in the latest quarter. The net result is that the profitability of Bank of America's individual units is artificially inflated in the graphic above, as they don't bear the full cost of operating the company.
Ultimately, the thing for investors to keep in mind is that there are two factors in particular that fuel Bank of America's revenue and earnings. The first are higher interest rates, as that increases the amount of money a bank earns from its loan portfolio. The second is robust economic activity, as the more money that's pulsating through the economy, the more Bank of America will earn in noninterest income.
