BofA profit falls on $3.7 billion in charges, sees resilient US economy

Bank of America’s fourth quarter profit shrank as the lender took $3.7 billion in one-off charges on Friday, and its finance chief expressed optimism about the US economic outlook.

Prospects for the US economy have brightened after the Federal Reserve paused interest rate increases late last year. It is now expected to cut rates this year.

“We feel pretty good about the economy,” Chief Financial Officer Alastair Borthwick said on a call with reporters.

“The consumers still have plenty of firepower” in a strong labour market, he said.

Shares of the second-largest US lender fell nearly 3 per cent in premarket trading on Friday after it posted net income of $3.1 billion, or 35 cents a share, for the three months ended Dec. 31. That compares with $7.1 billion, or 85 cents a share, a year earlier.

Excluding two charges related to replenishing a fund for bank failures and phasing out an interest rate benchmark used in some commercial loan contracts, the bank reported a profit of 70 cents, slightly above LSEG estimates of 68 cents.

BofA managed to offset some declines with strong gains in trading and investment banking.

Trading revenue rose 1 per cent to $3.8 billion in the fourth quarter, driven by a 12 per cent jump in revenue from equities, while a pickup in dealmaking in the fourth quarter pushed up investment banking fees 7 per cent to $1.1 billion.

The bank’s net interest income (NII) - the difference between what banks earn from loans and pay to depositors - fell 5 per cent to $13.9 billion after a windfall year in 2023.

BofA expects NII to dip to a trough in the first half of this year and grow in the second half, CEO Brian Moynihan told investors last month, as lower rates push down the interest income that banks make off loans.

Loans are expected to grow at low to mid-single-digit percentage in 2024, after expanding nearly 0.8 per cent in the fourth quarter.

BofA took a pre-tax charge of $2.1 billion in the fourth quarter to pay a “special assessment” fee to replenish a Federal Deposit Insurance Corporation (FDIC) fund that was drained by $16 billion to cover depositors of two banks that collapsed in 2023.

The bank also took a charge of about $1.6 billion in the fourth quarter as it phases out a Bloomberg interest rate benchmark used in some commercial loan contracts. That amount is expected to be recognised back into its interest income through 2026, BofA said.

Bank of America also reported lower unrealised losses on securities held until maturity, helped by a rally in bond markets. The bank had unrealised losses of almost $98 billion in the fourth quarter, down from paper losses of $131.6 billion in the third quarter.

Net charge-offs, or debts that are unlikely to be recovered, rose to $1.2 billion in the fourth quarter from $931 million in the third quarter, mainly from credit cards and office real estate.

Meanwhile fourth-quarter earnings for S&P 500 companies overall are expected to have increased 4.4 per cent from a year earlier, LSEG data showed on Friday, just as results from four of the country’s biggest banks kicked off the latest US earnings season.

That increase is down from a 5.2 per cent gain estimated on Dec. 22, and it follows a 7.5 per cent rise in the third quarter and a 2.8 per cent fall in the second quarter of last year, based on LSEG data.

The third quarter of 2023 “marked the beginning of an earnings recovery, which is forecasted to reaccelerate throughout 2024,” UBS equity strategist Jonathan Golub and his team wrote in a note this week.

However, revisions for fourth-quarter estimates have been weaker than the historical trend, he wrote.

Analysts expect S&P 500 earnings to rise by 11 per cent in 2024 after increasing just 2.9 per cent in 2023, based on LSEG data Major US banks reported lower profit on Friday in a quarter hit by special charges and job cuts.

The banks - JPMorgan, Wells Fargo, Bank of America, and Citigroup - also said that American consumers remained resilient, although defaults on consumer loans began returning to pre-pandemic levels.

Even as its quarterly profit fell, JPMorgan reported its best-ever annual profit and forecast higher-than-expected interest income for 2024.

Among companies due to report next week are Goldman Sachs, Morgan Stanley and Travelers Cos.