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Bank of America says net interest income is outperforming expectations


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Bank of America says net interest income is outperforming expectations

Falling interest rates continue to be a headwind, but Bank of America Corp. is performing better than expected, executives said on a call with analysts to discuss third-quarter results.

Despite a rapidly changing rate environment, the bank stuck to its forecast that its net interest income could increase 1% in 2019, compared to the year prior. The company had given that guidance, based on the forward curve at the time, when it reported second-quarter earnings in July.

"We've managed better than we thought we could," Chairman and CEO Brian Moynihan said during the third-quarter call.

In the third quarter, BofA's net interest income was about flat with the second quarter at $12.19 billion. The bank said that lower yields on floating-rate assets and faster prepayments on mortgage bonds were offset by factors including loan and deposit growth, and a decline in the cost of deposits.

BofA's cost of interest-bearing deposits fell 5 basis points from the previous quarter to 0.76%. Its net interest margin contracted 3 basis points to 2.41% over the same period.

CFO Paul Donofrio said the effect of mortgage bond prepayments ahead should diminish in the absence of a further meaningful decline in long-term rates. The bank expects to encounter a drag as low short-term rates continue to flow into yields for variable-rate assets and as it reinvests money from maturing securities at lower rates. But BofA is counting on offsets in the form of balance sheet growth and lower debt costs.

Donofrio declined to be specific about the bank's outlook for 2020, saying results will "be highly dependent on future [Federal Reserve] activity and deposit pricing across the industry." BofA is asset sensitive overall, largely because of its large base of low-cost deposits.

Broadly, however, Donofrio said the company feels good about its performance despite adverse interest rate conditions.

"We've seen how our teams, and our clients, by the way, have reacted to appropriate adjustments on deposit pricing given the change in [the London interbank offered rate]," he said. "It's just another quarter under our belt where rates were different and we've seen how the teams have performed and we're feeling good."

BofA has consistently posted strong deposit growth. In the third quarter, its total deposits increased 1.3% from the previous quarter and 3.5% from the year prior to $1.393 trillion.

Moynihan said the bank expects the growth to continue.

"Our thought process is to tell our teammates to price to achieve sustainable deposit growth of 3% or more," which is faster than the economy has been growing and implies steady gains in market share, he said. "You should expect us to continue to grow at the rate we're growing now or faster because, frankly, we've been very disciplined" about pricing and focused on core account relationships.

Donofrio said the bank's competitive proposition for depositors, which is based on factors like technology capabilities and its national network of branches, might be enhanced by low rates.

"If interest rates are lower, then deposit rate paid is less important relative to all the other reasons people deposit with us," he said. "So, theoretically, you might see more deposit growth in a lower interest rate environment."

In terms of BofA's ability to continue to reduce deposit costs, Donofrio said on a separate call with reporters that there is limited space to maneuver on consumer accounts.

In the consumer arena, rates "never went up that much during the small rate increasing cycle that we saw," he said. "So there won't be a lot to reduce there. On the other hand, in [global wealth and investment management], where our customers have a lot of options [including] money market alternatives, and in global banking, rates did rise there as interest rates were rising previously, and so there will be more room."