Thursday, April 16, 2020

Bank of America Shares Slide Despite Revenue Growth

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What’s happening: Shares of Bank of America dropped more than 6% on Wednesday, even as the banking giant reported its first-quarter revenue ahead of expectations.

What happened: America’s second-biggest lender reported a slight decline in its first-quarter revenue to $22.77 billion, from $23.00 billion reported for the same quarter last year. The results came in higher than the consensus estimate of $22.70 billion.

Despite the many positives reported for the quarter, renewed concerns over the bank’s profitability resulted in the stock closing the trading day 6.41% lower at $22.19 yesterday. Shares inched up 1% in premarket trading today, mainly on profit taking

Why it matters: Bank of America joined other major banks, including JPMorgan Chase and Wells Fargo, in setting aside $3.6 billion to its loan-loss reserves during the quarter due to the coronavirus pandemic.

The company reported its first-quarter net income at 40 cents per share, down almost 50% from the 70 cents per share recorded in the same quarter last year.

Although BofA’s advisory fees declined in the first quarter, its robust underwriting business helped the bank’s investment banking division. An increase in equity and debt underwriting fee drove the bank’s investment banking fees 7% higher. Revenue from equities jumped 39% to $1.7 billion in the quarter and came in around $300 million higher than expected. Fixed income, currency and commodities revenue gained 13% to $2.7 billion, around $200 million more than projected.

Though the bank suspended its repurchase program, it did not halt dividend payments and announced 18 cents per share in dividends for the first quarter.

BofA Chairman and CEO Brian Moynihan said, “Our results reflect the strength of our balance sheet, the diversity of our earnings, and the resilience of our teammates to serve clients around the world.”

What's the problem? Banking stocks have been hurt badly after the pandemic put a break on the US economy’s strong growth. Investors have been selling banking stocks expecting this industry to face loan defaults from most customers.

On the other hand, the Federal Reserve cutting interest rates to almost zero to combat the coronavirus impact on the economy could result in a decline in Bank of America’s net interest income, despite growth in loans.

How the shares responded so far: Bank of America’s shares have been under significant pressure. The stock has declined more than 8% over the past month, while losing a whopping 37% year to date.

What to watch: Bank of America’s recent measures to focus on digitising operations, expanding branches and realigning its balance sheet are expected to help the bank post modest growth in the near future. On the other hand, rising credit costs following the economic slowdown could continue be a major concern.

The Markets Today

     

US stocks may be in focus today, as investors await earnings reports from various companies and economic data from the country.

Context: US stocks closed lower on Wednesday following disappointing earnings reports and economic data due to the coronavirus pandemic. Despite European and US governments considering plans to relax some of the coronavirus-related restrictions, investors focused on the dismal corporate earnings reports highlighting a massive impact of the pandemic on business.

Details: After rising over 550 points on Tuesday, the Dow gave up gains and fell around 450 points in the last trading session. Major banking stocks reported huge declines in their profits after taking charges for credit write-offs.

Energy and material-related stocks tumbled the most in the S&P 500 index, as crude oil prices settled below $19 per barrel on Wednesday, after the IEA (International Energy Agency) warned of a record drop in oil demand.

The Dow dipped 445.41 points to close at 23,504.35 on Wednesday. The Nasdaq 100 was down 1.4% at 8,393.18, while the S&P 500 declined 2.2% to settle at 2,783.36.

Recent economic reports pointed towards serious economic challenges from the coronavirus outbreak. US retail sales declined 8.7% in March, worse than the already dismal projection of a 7.1% drop. Industrial production was also down by 5.4% in March. The New York Empire State Index tumbled to a record low reading of -78.2 for April.

Citigroup’s shares tumbled 5% after the bank reported a 46% decline in its first-quarter profits. Goldman Sachs reported downbeat quarterly earnings, while sales topped views. This was the same for Bank of America. However, UnitedHealth Group’s stock bucked the market trend, gaining over 4% after the company reported stronger-than-expected quarterly results.

Investors continue to monitor daily coronavirus numbers, with the total number of cases surpassing 2,065,900 globally. The number of positive cases in the US has exceeded 639,660 with around 30,980 deaths.

In other news, WTI crude for May delivery dipped 1.2% to settle at $19.87 per barrel, while June gold rose 1.6% to settle at $1,740.20 an ounce.

What to watch: Investors will continue to focus on earnings reports from major companies including Morgan Stanley, Abbott Laboratories and Intuitive Surgical. US stocks are expected to rebound slightly today, with stock futures pointing towards a higher start.

Investors also await a basket of economic reports from the country, including initial jobless claims, housing starts, building permits and Philadelphia Fed manufacturing index. Analysts expect initial jobless claims to total 5.105 million in the latest week. The Philadelphia Fed Manufacturing Index, which declined to -12.7 in March, is expected to drop further to a reading of -30 in April. Housing starts and building permits are likely to decline to an annualised rate of 1.3 million each in March.

Other Markets: European indices were trading higher at 9:00a.m. GMT, with the FTSE 100, German 30 and French 40 up by 0.3%, 1.3% and 1.2%, respectively.

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What else to watch today

     

Canada’s new motor vehicle sales and manufacturing sales, Russia’s producer prices and industrial production as well as the US natural gas stocks change.