Bank of America’s Profits Lifted by Tax Law, Rising Interest Rates


Bank of America
Corp.


BAC -2.77%

said Monday that a boost from the U.S. tax law and continued rising interest rates helped push first-quarter profit higher, extending the string of better-than-expected results from the nation’s biggest banks.

Quarterly profit at the Charlotte, N.C.-based bank was $6.92 billion, compared with $5.34 billion a year ago. Per-share earnings were 62 cents; analysts had expected 59 cents per share.

First-quarter revenue for the bank run by Chairman and Chief Executive

Brian Moynihan

came in at $23.13 billion, up from $22.25 billion a year ago. Analysts had expected $23.06 billion.

Bank of America shares, up nearly 1% in 2018, rose about 0.9% to $30.08 in premarket trading. After a huge run-up following the 2016 presidential election, bank stocks broadly have stalled so far in 2018.

This quarter is the first time investors have a chance to see exactly how much the recent tax law is helping the bank’s bottom line. The banking industry was one of the biggest beneficiaries of the lower corporate tax rate. While it led to big one-time charges last quarter, the lower rate is starting to lift bank earnings this quarter. Much of that is already in analysts’ estimates for the bank’s future profits, however.

Bank of America said its effective tax rate fell by 9 percentage points because of the bill. In the quarter, the bank paid $1.48 billion in income taxes, compared with $1.98 billion in the year-ago quarter.

The tax benefits notwithstanding, the bank’s underlying performance also was strong. Income before taxes—a good way to look at the bank’s performance without the tax boost—increased about 15% to $8.39 billion from $7.32 billion a year earlier.

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Bank of America’s return on equity hit 10.85% this quarter, above the bank’s theoretical 10% cost of capital. That is a milestone for the bank, which has struggled to lift this key metric in recent years. In the year-ago quarter, the metric stood at 8.09%

“Strong client activity, coupled with a growing global economy and solid U.S. consumer activity, led to record quarterly earnings,” Mr. Moynihan said in a news release.

Rising interest rates also helped earnings. Higher rates are typically good for banks because they turn a profit on the difference between what they pay on deposits and the rate they collect on loans. In the quarter, the Federal Reserve raised its benchmark rate for a sixth time. Bank of America said its net interest income rose about 5% from a year earlier.

Banks have been able to pocket most of the benefits from the rate increases because customers aren’t broadly demanding more interest. The rate Bank of America paid on U.S. interest-bearing deposits was 0.30%, only a slight rise from 0.27% in the prior quarter. Still, deposits rose more than 4% from a year earlier.

Another bright spot for the bank’s profit outlook: After a number of quarters of disappointing trading revenue, wild price swings for markets in the first quarter meant Wall Street’s trading desks had a pretty good quarter. Still, results weren’t much better than a year ago, which also was busy following the 2016 U.S. presidential election.

Bank of America reported that trading revenue, excluding an accounting adjustment, rose less than 1% to $4.05 billion from $4.03 billion in the first quarter of last year. Equities revenue increased 38%, while revenue from fixed income, currency and commodities was down 13%.

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JPMorgan Chase

& Co. and

Citigroup
Inc.,

the other two big Wall Street banks that reported results Friday, also showed rising trading revenue. Bank of America’s gain was more in line with Citigroup’s 1% bump than JPMorgan’s 13% move.

Mr. Moynihan, now in his ninth year as CEO, has made cost cutting a key tenet of his business strategy. In the first quarter, expenses fell about 1% to $13.90 billion from $14.09 billion a year ago. That helped push the bank’s efficiency ratio, which measures expenses as a percentage of revenue, below 60%, compared with 62.8% a year ago.

Loan growth, which has slowed down across the banking industry since the 2016 presidential election, rose 3% from a year earlier at Bank of America.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com



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