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Higher Revenue Drives a Surge in Bank of America's Q1 Earnings

By John Maxfield – Updated Apr 19, 2017 at 12:04AM

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The nation’s second biggest bank by assets turns in a solid first-quarter performance.

Bank of America's (BAC -0.18%) first-quarter earnings, reported Tuesday, reaffirm that the nation's second biggest bank by assets is continuing to make progress in putting distance between itself and the financial crisis. For the three months ending March 31, Bank of America earned $4.3 billion, 44% more than the year-ago period.

"Our approach to responsible growth delivered strong results again this quarter," said Chairman and CEO Brian Moynihan in prepared remarks. "The U.S. economy continues to show consumer and business optimism, and our results reflect that."

Bank of America Chairman and CEO Brian Moynihan.

Bank of America Chairman and CEO Brian Moynihan. Image source: Bank of America.

Bank of America's earnings growth was powered by a $1.5 billion increase in its top line. The biggest contribution was from trading revenue, which came in at $3.9 billion, a 23% increase over the first quarter of 2016. The North Carolina-based bank wasn't alone in this regard, as JPMorgan Chase and Citigroup also reported double-digit increases in their quarterly trading revenue for the first three months of the year.

These performances were less about the first quarter of this year and more about the beginning of last year. Turmoil in the capital markets at the time caused institutional investors to stay on the sidelines, depriving Bank of America, JPMorgan Chase, and Citigroup of the revenue they'd otherwise earn making markets in fixed-income and equity securities.

Higher interest rates also contributed to Bank of America's top-line growth. The bank estimated last year that a 25-basis-point increase in the fed funds rate would translate into an added $600 million worth of quarterly net interest income. That's almost exactly what we saw. The Federal Reserve raised rates in December, leading to $573 million worth of additional net interest income for Bank of America.

A bar chart showing Bank of America's first quarter net income.

Data source: Bank of America. Chart by author.

And things should only improve from here. Bank of America is one of the most asset-sensitive banks in its peer group, meaning that higher rates will have a more potent impact on its revenue than other banks. On top of this, the Fed raised rates again in March, which should further boost Bank of America's net interest income in the quarters ahead.

Bank of America benefited as well from lower loan loss provisions -- money set aside in anticipation of future loan losses. In the first quarter of last year, banks ratcheted up their provisions, as cratering energy prices were causing an uptick in defaults among oil and gas companies. This is less of a concern because oil prices have since doubled, enabling Bank of America to reduce its first-quarter provision expense by $162 million.

The one aspect of Bank of America's earnings that went against expectations was a slight increase in operating expenses. This was mostly due to higher compensation expenses. This is a surprise given that Bank of America committed last year to reducing annual expenses by an additional $3 billion by the end of 2018. This is obviously only one quarter out of a dozen, but the trend is certainly in the wrong direction.

Expenses aside, there was a lot to like in Bank of America's first-quarter performance. Most importantly, its return on tangible common equity came in at 10.3%. That's less than the bank's 12% target, but it nevertheless represents a meaningful improvement from 7.3% a year ago.

John Maxfield owns shares of Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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