Bank of America Isn't Earning Its Trump Bump - Bloomberg

https://www.bloomberg.com/gadfly/articles/2017-10-13/bank-of-america-earnings-not-earning-its-trump-bump

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Bank of America Corp.’s Trump bump is looking increasingly as if it was more than it deserved.

Shares of the bank have risen nearly 50 percent since Election Day. That’s still more than its rivals, but others have nearly caught up. In March, though, Bank of America had a commanding lead over its rivals as the bank that would be able to cash in most in the post-election world. It hasn’t turned out that way. The third quarter was more evidence of that. 

Looking Winded

Shares of rivals have caught up to Bank of America after leading the pack earlier this year

Source: Bloomberg

Bank of America said Friday morning that its quarterly earnings per share rose nearly 17 percent to 48 cents, which was only two pennies more than analysts were expecting. The bank’s revenue of $21.8 billion was slightly below expectations, though. The biggest disappointment: The areas of the bank that were supposed to get the biggest bump from the presidency of Donald Trump — notably lending — didn’t deliver. Net interest income of $11.2 billion rose just 1.6 percent from the prior three months, which was below some analysts’ expectations.

Lending Less

Loan growth at Bank of America is stalling

Source: Bloomberg

That’s not what was supposed to happen. Soon after Trump was elected, business sentiment surged. Borrowing, particularly by businesses, was assumed to follow. And Bank of America was well positioned to benefit. It’s the nation’s second-largest business lender after Wells Fargo. Business lending, however, which rose nearly 8 percent last year, is up just 3 percent this year through the first half of the year. Bank of America isn’t even doing that well. Lending at the bank rose just 2.4 percent from a year ago.

The second leg of the Trump bump was supposed to be interest rates. Bank of America, because of its large deposit base and mortgage portfolio, was thought to be able to capitalize.  And Bank of America CEO Brian Moynihan has repeatedly said that his bank would benefit when rates rose, boosting lending margins. Again, Trump hasn’t been the catalyst that many thought he would be. The Federal Reserve has raised short-term interest rates slightly. But Trump’s promised infrastructure spending and tax cuts, which were supposed to boost the economy and inflation, haven’t materialized. As a result, long-term interest rates have mostly been flat. That’s acted like a weight on Bank of America’s earnings, rather than a boost. Bank of America’s net interest yield, essentially the return it is earning on its loans and investments, stood at 2.36 percent in the quarter, down from what the bank was earning in the first quarter. 

At the same time, Bank of America, like other banks, is running into a problem with its credit card business. The bank set aside $800 million for future loan losses in the quarter, up $100 million from the quarter before. All told, Bank of America’s all-important return on tangible common equity rose 0.1 percentage points in the quarter to 11.3 percent, short of the bank’s stated goal of 12 to 13 percent.

The bank did cut expenses more than expected in the third quarter. But now that Bank of America is below what it has targeted for overall costs, more lift from reducing costs might be tough. 

Bank of America’s shares now trade at slightly above book value, having crossed that earlier this year, for the first time since the financial crisis. Investors have bid up the stock expecting a Trump dividend. If they don’t get one soon, they may soon take their money elsewhere.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Stephen Gandel in New York at sgandel2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net