Bank of America profit tops estimated as lender releases reserves for soured loans

April 19, 2022: -On Monday, Bank of America posted a first-quarter profit that exceeded analysts’ estimates, helped by the better-than-expected credit quality of its borrowers.

The bank said that profit came down to 12% to $7.07 billion, or 80 cents per share, growing over the 75-cent estimate of analysts surveyed by Refinitiv. Revenue is increasing 1.8% to $23.33 billion, which matches expectations.

Shares of the bank surged 1.3% in premarket trading.

Bank of America said that a run of solid credit at the second-biggest U.S. lender by assets continued into the first quarter. Net loan charge-offs, an industry term for borrowers falling behind on their payments, dropped 52% from a year earlier to $392 million. That was lesser half of the $848.7 million StreetAccount estimates.

The bank posted a $30 million provision for credit losses, which is the management’s view of potential future losses, lesser than the $468 million expected by analysts. It released $362 million in reserves the bank had set aside for expected defaults.

“First-quarter results were strong despite challenging markets and volatility, which we believe reflect the value of our `Responsible Growth’ strategy,” CFO Alastair Borthwick said in the release.

Bank of America’s moves contrasts to rival JPMorgan Chase, which disclosed in the previous that it took a $1.46 billion provision for credit losses, which included adding loan-loss reserves by $902 million, on concern including odds of a recession.

Bank of America, led by CEO Brian Moynihan, is enjoying tailwinds as increasing interest rates and a rebound in loan growth promised to boost income. But bank stocks got hammered this year between concerns that higher inflation would help spark a recession, which would lead to higher defaults.

While longer-term rates jumped during the quarter, short-term rates increased more, and that flat, or in a few cases inverted, yield curve spurred concerns regarding an economic slowdown ahead.

“The BAC story is about Main St. banking (strong) vs. Wall St. banking (weak),” banking analyst Mike Mayo of Wells Fargo said on Monday in a research note. He added that the company beat expectations “largely from credit” as loan losses were close to a record low.

Bank of America’s trading operations did not generate as much outperformance as those at Goldman Sachs and JPMorgan in the quarter, which took advantage of the Ukraine war’s surging volatility.

Bank of America’s fixed income traders posted revenue of $2.65 billion, roughly matching the $2.69 billion StreetAccount estimate. Equities revenue of $2 billion exceeded the forecast by almost $400 million, thanks to higher client activity and potent derivatives results.

Investment banking fees are slowing down by a steeper-than-expected 35% to $1.5 billion, beneath the $1.74 billion estimates, reflecting a slowdown in mergers and IPOs in the quarter.

Bank of America shares have decreased 15% this year before Monday, worse than the 11.6% decline of the KBW Bank Index.