- Bank of America’s third quarter profit fell 17% to $6.93 billion, or 91 cents a share against $1.10 expected, with the $1.2 billion regulatory penalty costing 17 cents. Revenue rose 3.2% to $30.12 billion but came in roughly $570 million below the $30.69 billion expected.
- Trading was the shortfall. Fixed income revenue dropped 17% to $2.55 billion, about $450 million below estimates, while equities rose 10% to $2.51 billion but still missed by nearly $300 million, a combined gap of roughly $750 million. Chief executive Brian Moynihan had told analysts last month that trading revenue would be roughly flat; the combined result fell 5%.
- The explanation offered invites scrutiny. Chief financial officer Alastair Borthwick said that when rates rise 85 basis points in a quarter it tends not to be good for credit and mortgage trading. Citigroup’s fixed income traders posted higher revenue while rivals missed, under identical conditions.
- The core franchise held up. Net interest income rose 7.9% to $16.6 billion, edging past the $16.53 billion estimate, and investment banking revenue fell 11% to $1.8 billion roughly in line with September guidance.
What Happened?
Wells Fargo analyst Mike Mayo called the capital markets results easily worst in class for the quarter. On the earnings call JPMorgan analyst Vivek Juneja told Moynihan that while the bank can absorb a billion dollars, it is obviously a reputational and confidence issue. Moynihan declined to commit to a timeline for resolving the regulatory matters, saying the work has to be done and then regulators review it, while adding he is confident the bank is on the right course to remediate everything. He took the role in 2010 and spent his early tenure addressing mortgage-related abuses from the financial crisis. Separately, JPMorgan missed both earnings per share and revenue estimates for the first time in years, with Goldman Sachs, Citigroup and Wells Fargo posting mixed results.
Why It Matters?
Attributing a trading miss to an 85 basis point rate move describes the environment rather than explaining the underperformance, because every competitor traded through the same quarter. Citigroup’s fixed income desk beat while others missed, and Goldman’s equity traders delivered strongly even as its credit and rates desks fell short. A desk that loses ground when rates move sharply in a period defined by the first Federal Reserve increase in three years, 30-year yields at levels unseen since 2002 and mortgage bonds recording their second-worst year in a 50-year index history was positioned for stability during an unusually unstable quarter. That is a risk management outcome, not a market condition. The guidance failure compounds the regulatory one and that is what Juneja was pointing at. Telling analysts in September that trading would be flat and reporting a 5% decline with a $750 million miss in October is a short interval for a forecast to break, and it arrives in the same week regulators found the bank failed to report billions in suspicious transactions. Both are failures of internal visibility rather than market misfortune, which is why the questions on the call concerned confidence rather than earnings. Mayo’s reversal is worth noting for anyone following sell-side views. Two weeks ago he was the sector bull, arguing the AI scare trade would unwind on results because trust at banks is a moat for deposits. He now describes this bank’s capital markets performance as worst in class, on an institution whose problem is precisely trust in its own controls. The buried detail may matter more than everything above it: JPMorgan missing both lines for the first time in years suggests pressure that is not specific to one poorly run division. Bank of America’s core lending business performed, with net interest income beating, so the franchise is intact and the damage is concentrated in trading and compliance.
What Next?
Remediation costs and the pace of investigator hiring are the expenses to track, with the OCC indicating thousands of new staff are required and Moynihan declining to give a timeline. Watch fourth quarter trading results against peers, since the rates explanation is testable and the 10-year has since fallen to 5.08% from a 5.36% peak. Share repurchase pacing was questioned on the call and is the clearest signal of management’s confidence in capital. For the sector, JPMorgan’s miss deserves more attention than it has received, and the remaining results will show whether it was isolated.
Affected Tickers and Coins: BAC, JPM, GS, C, WFC
Source: CNBC
