Update: Bank Of America Earnings - Net Interest Income Continued To Fall; Definitely Worrying

Jul.18.14 | About: Bank of (BAC)

Summary

BAC’s net interest income declined 5% from the year-ago quarter to $10.2 billion.

Its wealth business reported record revenue of $4.6 billion and record total client balances of $2.47 trillion.

In our original analysis we maintained a neutral stance on BAC despite a thriving wealth business, since we expected net interest income to fall again.

Bank of America (NYSE:BAC) reported its second quarter 2014 earnings of 19 cents a share, down from 32 cents a share a year earlier. Litigation expenses continued to hurt profitability, as we anticipated. Excluding $4 billion of litigation expenses, however, the bank reported earnings of 41 cents a share. Nonetheless, the ongoing negative trend in net interest income remained intact. The bank said:

Net interest income, on an FTE basis, declined 5 percent from the year-ago quarter to $10.2 billion. The decline was driven by lower yields on debt securities due to a $528 million change in market-related premium amortization expense. Excluding these market-related adjustments, net interest income was relatively stable at $10.4 billion for both periods and the net interest margin was 2.26 percent in the second quarter of 2014, compared to 2.28 percent in the second quarter of 2013.

Although BAC claimed that the decline was driven by lower yields on debt securities, the fact of the matter is net interest margin also declined. Since net interest margin is the spread between interest earned and interest expended by the bank, it's directly related to the bank's profitability.

BAC Net Interest Income (<a href=

BAC Net Interest Income (TTM) data by YCharts

In our original analysis, we showed that BAC's net interest income has fallen 16.5% in absolute terms since the beginning of 2011, which is the steepest among competitors, such as Citigroup (NYSE:C) and Wells Fargo (NYSE:WFC). We said that despite a thriving wealth business, we're neutral on the stock, primarily because of the negative trend in net interest income. We also said that we expect the negative trend to continue. We'd recommend investors to keep a close eye on the bank's net interest income figure in the coming quarters.

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