Bank of America Corp (BAC) Reports $21.3 Billion In Energy Exposure; Beats On EPS Despite Revenue Miss
Tyler Durden: In the aftermath of Citi and JPM’s earnings last week, the only thing investors wanted to know about when it came to the just released Bank of America earnings moments ago, was the bank’s energy exposure, and we’ll get to that in a second, but first here are the housekeeping items.
Bank of America reported Q4 EPS of $0.28, or $0.29 ex-DVA, a modest improvement from a year ago, and above the 0.27% expected, driven by ongoing expense reduction in the form of fewer lawsuits and fewer employees. However, GAAP revenue of $19.5 (not the non-GAAP revenue of $19.8 proudly featured), missed expectations of $19.8 billion, on continued deterioration in Sales and Trading revenues.
The expense reduction was driven by “progress made on LAS cost initiatives, while benefits from optimization efforts across the franchise were largely offset by investments in the business” as well as the bank’s never-ending reduction in force: “FTE headcount was down 5% from 4Q14, as continued progress in LAS and other reductions in support staff and infrastructure more than offset increases in client-facing professionals.”
BofA did warn however, that compared to 4Q15, 1Q16 expenses are expected to be impacted by the following items:
- Annual retirement-eligible incentive compensation costs, which are expected to be approximately $1.0B
- Seasonally elevated payroll tax costs, which are expected to be higher by approximately $0.3B
- Revenue-related expenses associated with seasonally higher sales and trading results
Then again, if the recent trend is any indication, the “seasonally higher sales and trading results” may not be there: here is a chart of BofA’s revenue line item in this most important revenue stream:
The decline in revenue appears to be a function of continued contraction in the bank’s VaR, as more traders are hunkering down in light of the central bank cross currents observed over the past year, also leading to a notable drop in BofA’s average trading-related assets, which printed at multi-year lows of just $416BN in Q4, down $40BN from a year ago.
Here is BofA’s explanation on the full breakdown of its global banking operation:
- Lower IB fees versus 4Q14 were mostly offset by a gain on an equity investment in 4Q15
- FICC revenue increased $0.3B, or 20%, from 4Q14, reflecting improvement across most products, notably in rates and credit-related products
- Equities revenue decreased 3% from 4Q14, reflecting lower client activity
Unlike other banks, BofA did not cut trader pay as aggressively: Noninterest expense increased $0.2B versus 4Q14, due primarily to higher revenue-related expenses.
Finally, the last key “legacy” item was the Bank’s Net Interest Margin. Here there was little notable to report of, as adjusted Net Interest Yield rose fom 2.10% to 2.16%, representing $10.0 billion in Income, up from $9.7 billion the prior quarter, “driven by commercial loan growth and higher investment securities balances.”
But what about the future: after all the jump in NIM is why the Fed is hiking rates? Here BofA is certainly hopeful, and says the following:
We remain well positioned for NII to benefit as rates move higher:
- +100 bps parallel shift in interest rate yield curve is estimated to benefit NII by $4.3B over the next 12 months
- Asset sensitivity has decreased since prior quarter, driven primarily by increases in long-end rates and higher securities balances
Good luck with that 100 bps parallel shift: for now the curve is not only shifting in the – not + direction, but it continues to flatten with every passing day. Oddly enough, there was no comment on that.
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And as for the data we’ve all been waiting for, first a quick snapshot of BofA’s overall Asset quality trends, we find that net charge offs jumped by $1.1 billion, a 0.51% ratio, the highest since Q1 of 2014 and an increase of $0.2B from 3Q15, “driven by an increase in commercial charge-offs related to the energy sector.” Here we go.