Bank Of America: Why Moynihan Fired The Warning Shot Heard Around The Market

Chris B Murphy profile picture
Chris B Murphy
3.66K Followers

Summary

  • With the 2-year Treasury yield down over 3% and the 10-year yield down almost 6%, Bank of America may post a lower net interest income in Q2.
  • In this analysis, we calculated the average 1O-year yield for the last two-quarters and compared those averages to the Q2 average to date.
  • The average quarterly yield smooths out extreme price movements and provides us with a better sense of how Bank of America should perform in Q2.

Brian Moynihan, the CEO of Bank of America (NYSE:BAC), fired a warning shot to investors this week when he said that Q2 results might come in lower than expected.

"Bank of America Corp second-quarter earnings will be hurt by a drop in trading revenue, lower-than-expected interest rates and the sale or shuttering of certain assets, according to comments from Chief Executive Brian Moynihan on Wednesday." - Reuters

Mr. Moynihan said net interest income should be lower by $100 to $110 million. He went on to say that "revenues will also be hurt by lower-than-anticipated interest rates."

If you've been following my articles, we've been analyzing the economic factors that impact bank earnings. Some of these factors include Treasury yields, loan growth, the economy and more specifically how they impact net interest income (NII) and the stock price.

The below chart shows where Treasury yields have been trading in Q2 and where we stand as of June 1st. The 10-year yield has come off its highs from this quarter while the 2-year has been mostly quiet.

2 Year Treasury Rate Chart

2 Year Treasury Rate data by YCharts

Are yields really that far off from last quarter at this time?

Here's where yields stood at this time last quarter or January 1st to February 28th.

2 Year Treasury Rate Chart

2 Year Treasury Rate data by YCharts

In looking at Q1 yields in the above chart, we can see that the Q1 2-year versus the current 2-year yield (quarter-to-date) is virtually unchanged. The Q2 10-year yield is down slightly from the Q1 yield two months into the first quarter.

So why did Mr. Moynihan warn investors? Sure they had a sale of the U.K. credit card business, but I doubt that sale will have a material effect on the entire bank's revenue stream and net interest income.

Here's what I believe

This article was written by

Chris B Murphy profile picture
3.66K Followers
Hello. I'm a financial writer/blogger & market risk analyst with 15 years in the financial services industry including over 10 years on trading desks of two major banks. --------------------------------------------------------------------------------------------------------------------- My Top-Down meets Bottom-Up Approach to financial analysis includes: ----------------------------------------------------------------------------------------- How Macro Trends & Economic Indicators, Bond yields, Capital flows, & The Fed - Drive Sectors & ultimately Individual Stocks. - Financial analysis of Bank stocks, Commodities, Industrials, & Tech. - Former currency risk advisor to Corporates, with Options and risk policy experience.- Published Work includes: Financial analysis (Investopedia); - Retirement Income (RetirementIncomeAnalyst.com) & Wealth Management Firms. - Hold an Economics degree with a concentration in Finance (University of Rhode Island).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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