Text size
Bank of America shares weakened as the lender made a downbeat forecast on a key component of earnings and reported fourth-quarter profits that topped Wall Street expectations but declined 4% year over year.
Shares were down 2.2% in morning trading after the nation’s second-biggest bank reported earnings of $0.74 a share, beating analyst estimates of $0.68. The bank said on a conference call with investors that net interest income is likely to fall in the first half of the year.
Revenue was in line with projections, coming in at $22.3 billion for the quarter.
The company has had an impressive run recently, with shares climbing 43% in 2019. But a renewed era of low interest rates hampered Bank of America’s (ticker: BAC) performance. Net income was $7 billion in the fourth quarter of 2019, compared with $7.3 billion a year earlier.
“The company managed well through a period of transition from rising rates to lower rates over a short period of time. Solid client activity in growing loans and gathering deposits helped us offset spread compression,” chief financial officer Paul Donofrio said in Wednesday’s release.
The Federal Reserve gradually raised interest rates nine times between 2015 and 2018, a benefit for banks because it can widen their net interest margins—the spread between the interest they earn from loans and the interest they pay for deposits. But worries over trade and slowing global growth forced the Fed to lower rates three times in the past year, compressing margins again.
The bank said its net interest income would decline in the first half of the year as it adjusts the interest rates it pays on deposits in response to the rate cuts. By the third quarter, assuming a strong economy that leads to growth in both lending and the bank’s deposit base, net interest income will start growing again, management said.
“ It just it takes a little while to get [ underneath ] the 75 basis point rate cut in four months,” Chief Executive Brian Moynihan said on a call with analysts. Basis points are hundredths of a percentage point.
On the positive side, the rate cuts have made consumers more confident and helped the economy to keep expanding.
“In a steadily growing economy marked by solid client activity, our teammates produced another strong quarter and year, allowing us to increase investments in our customers, communities, and employees, while keeping a close eye on expenses,” Moynihan said in a news release.
Bank of America is the fourth of the major banks to report earnings this week. Goldman Sachs Group (GS) also reports Wednesday. JPMorgan Chase (JPM), Citigroup (C) , and Wells Fargo (WFC) reported Tuesday. Morgan Stanley (MS) shares its results Thursday.
Write to Carleton English at carleton.english@dowjones.com