NEW YORK: Bank of America Corp lowered its annual net interest income guidance on Wednesday to reflect a weakened interest rate environment as the second-largest US lender reported higher-than expected earnings fuelled by strong consumer trends.
Rate trends have prompted the bank to scale back its expected full-year net interest margin, a key measure of profitability, to 2 per cent from 3 per cent, executives said on a conference call with analysts.
Net interest income, the difference between interest earned from lending and how much the bank pays for deposits, rose 6 per cent last year.
Its interest margin fell in the second quarter to 2.44 per cent from 2.51 per cent three months earlier, though it was still higher than a year earlier.
Chief Financial Officer Paul Donofrio said on a call with reporters the sequential decline was due to lower long-term interest rates.
“When long-term interest rates fall, we see more people pay off their mortgages and that translates into more mortgage-backed securities being redeemed and that forces us to write off some premiums,” he said. “I don’t think you can extrapolate that into the future because long-term rates have stabilized at this point.” The lender is the most sensitive of the big US banks to interest rate changes because of its large deposit stock and rate-sensitive mortgage securities.
Consumer banking has held up for the big Wall Street banks that have reported second-quarter results this week, cushioning a blow from weakness in trading and advisory businesses.
But warning signs also emerged with JPMorgan, Citigroup and Well Fargo reporting a dip in margins, stoking fears that interest rate cuts could further pressure profit by narrowing the spread between what banks charge on loans and pay on deposits.
In the absence of higher interest rates to help pad revenue, banks can improve margins by reducing expenses. Chief Executive Brian Moynihan said on call with analysts that 2019 expenses are projected to be lower than 2018, against previous expectations for the bank to have flat expenses through 2020. — Reuters
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