With Bank of America’s earnings release this morning, the four largest American banks have reported earnings for the second quarter of 2017. Collectively, Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup earned $21.6 billion compared to $20.4 billion last year – an improvement of 6%. Recent stress test results also gave a boost to the financial sector, with the Federal Reserve allowing more generous dividends and share repurchases as banks balance sheets continue to be healthy.
Yet, with positive results expected the earnings gains have done little to lift the stocks of the companies reporting them. Bank of America is down about 1.6% today in trading on the New York Stock Exchange. Despite the modest sell-off in the stock, the bank improved on almost every metric watched by investors. Its net interest margin – the spread between what it lends money at and what it pays depositors – increased by 9 bps to 2.06% from the previous year, its net charge off rate declined by 4 bps from 0.40%, and its efficiency ratio – the ratio of non-interest expenses to revenue – declined from 63% to 60%.
While Bank of America’s return on tangible equity at 11% continues to trail leaders JP Morgan Chase and Wells Fargo, who reported 14% returns, CEO Brian Moynihan appears to slowly be closing the gap. Bank of America and Wells Fargo both also benefited from a greater reliance on mortgage lending, where delinquency rates continued at low levels when compared to Chase and Citigroup who rely more on auto and credit card lending.
A rise in loss rates from historically low levels is widely expected from investors in the coming years as lending returns to more normalized levels from the tight environment seen after the financial crisis. It is hoped that higher net interest margins – with help from the Federal Reserve – can offset the larger loan losses.