Aaron Back writes in the Wall Street Journal Wall Street Journal "Bank of America (BAC) has been one of the biggest recipients of rising interest rates in recent years."
Paul Donofrio, Bank of America's CFO agrees, "It's a good economy."
Herr. But now it's back that argues that "Now that the tail wind is gone."
On Tuesday evening, Bank of America reported a net profit of $ 7.3 billion, or 6 percent in the first quarter, beating analysts' expectations.
Nevertheless, the bank's share price, even though it dropped by more than 2 percent in the morning, closed today just about where it closed yesterday.
"Some words from CFO Paul Donofrio told investors everything they needed to know. Net interest income increased by 6% last year at a combination of higher prices and about 3% gross domestic product growth in the US, he said. This year, with the Federal Reserve on pause, assessing expectations back and GDP growth slows, net interest income is likely to increase only around 3%, he said. "
It looks as if Bank of America has had so much from the Federal Reserve policy in recent years, and not just because the Fed has raised interest rates. For one thing, Bank of America is a strong lender to consumers. Part of the Federal Reserve strategy during today's recovery has been to create a sufficient wealth effect in the economy so that spending spending can be stimulated and help boost economic growth.
This is exactly what has happened.
And the rise in interest rates over the last couple of years has played straight into this plan.
Until a year ago, the interest rate was still low enough that the net interest margin of commercial banks could be very low. The rising interest rate has meant that BofA's net interest margin is increasing, especially since many consumer loans have somewhat longer maturities than commercial loans and can benefit from an increasing yield curve.
The bank's performance over the last couple of years indicates that this is exactly what happened. That's why Mr. Back warns about what can happen if interest rates fall or, especially if they start to decline. Bank of America's tailwind may be gone.
BofA's CFO Paul Donofrio argued that "Net interest income will also probably fall in the second quarter." He added that "this is due, among other things, to the fact that lower long-term rates are running early on prepayment of mortgages and mortgage-backed securities. Interest income will then begin to grow again in the second half," he said, of course, on global economic conditions. "
. Donofrio concluded that "If conditions get worse and Fed edges against relief, all bets will be gone."
But when Donofrio was asked if he was considering measures to limit the bank's sensitivity to the interest rate, he did not rule it out. However, he explained that this move is very unlikely.
Thus, Mr. Back concludes that BofA's volatility in the exchanges is likely to remain until the interest rate actually stabilizes.
Overall, Bank of America posted some pretty admirable numbers. For example, the return on equity rose to 11.6 per cent in the first quarter. This does it right in the result mix of all six other largest banks in the United States.
It has taken Bank of America some time to reach this level, but when Brian Moynihan became the bank's CEO in 2010, the organization was actually losing money. The first full year Mr. Moynihan was CEO, Bank of America earned less than a 1.0 percent return on equity.
Although I have not been much of a fan of Mr. Moynihan, the Bank of America has seen its shareholder returns increase steadily during the economic upswing but comes only near a 10.0 percent return in 2018.
Herr. Moynihan continues to focus on building the largest consumer bank in the United States. This is particularly noticeable in three areas: cost management, financial center supply and becoming an industry leader in technology, especially in retail.
First, Bank of America experienced a 4.0 percent decline in overhead costs year on year. This performance continues Mr. Moynihan's emphasis on achieving and then maintaining industry standards in low infrastructure cost. He has seen good results in this area year after year.
Second, Mr. Moynihan has announced that BofA will establish 350 new financial centers on new and existing markets by 2021. He claims that more than 90 percent of the US population will have access to the Bank of America facility.
Thirdly, he wants the bank to be the technology leader for the retail customer. Digital sales are more than a quarter of the consumer income, and several organizations have declared Bank of America "Best in Class" in mobile banking.
Finally, Mr. Moynihan has seen that Bank of America is also a stock buyer. In the first quarter of 2019, the bank repurchased 6.3 billion of the shares.
Given all this activity, the BAC share price closed just around $ 30.00. A year ago, the stock price closed around $ 30.00.
Investors don't seem to be overwhelmed with what Mr. Moynihan does, nor what his vision is for the future of the Bank of America. This is in line with the attitude I have regarding BofA as an investment. I don't have a really good feeling about Mr. Moynihan or his ability to make the bank an industry leader. I felt this way in 2012, and I still feel like this today.
There are other big banks I would prefer to invest in.
Notice: I / We have no positions in any of the aforementioned shares, and no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.