The financial sector came through with a fairly phenomenal quarter. Banks in general have been able to lower operating costs, losses related to lending, and have been able to generate added fees from non-lending services. It’s also nice to know that this bank, in particular, has been able to increase the amount of lending income.
Earnings highlights
The company reported a 31% year-over-year reduction in credit related losses and followed that by reducing non-interest expenses by $1 billion. It also reported diluted earnings per share of $0.32 per share while the analyst consensus was $0.25, so the company beat its estimated earnings figure by a significant margin. It was able to grow second quarter earnings by 88% year-over-year.
Bank of America Corp (NYSE:BAC) also grew the size of its lending portfolio by $29.3 billion and deposits were up by $45.6 billion. It was able to grow its lending revenue, despite a cut on operating costs, which some feared would negatively impact top-line growth. However, this wasn’t the case and the stock popped.
Industry headwinds
Source: YCharts
Bank of America Corp (NYSE:BAC) has been able to experience the greatest gains in profitability, whereas Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) have maintained quarterly net profit margins around 25%. The banking sector in general has benefited from falling loan related losses and declining litigation related expenses.
JPMorgan Chase & Co. (NYSE:JPM) was recently squeezed by regulators for the manipulation of the energy markets. Further back, Bank of America Corp (NYSE:BAC) got caught up with a foreclosure scandal (it tried to prevent homeowners from applying for the Home Affordable Modification Program).
The CEOs of these large banking entities generally don’t endorse this type of behavior, but because these organizations are so huge, some of the decisions made by the employees result in litigation charges that the banks now have to deal with.
Fortunately, these types of litigation charges are expected to slow for the banking sector and will bring banks closer to profitability. If it so desired, Bank of America Corp (NYSE:BAC) could return value to shareholders if it were to reduce headcount while increasing the amount of lending.
Consumer and commercial banks
JPMorgan Chase was able to offset concerns by generating revenue growth from underwriting and asset management activities. Over the short-term, it seems the universal bank will be able to sustain higher rates of revenue than both Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC).
This is because Bank of America and Wells Fargo are heavily dependent on commercial/consumer lending and financial services. Unfortunately, there’s not a whole lot of pent-up demand on the commercial side of the business. The consumer business may grow at greater rates, but that’s because of housing; while the housing market is likely to recover, it won’t have enough of an impact to offset a weakening in the commercial side of the banking businesses.
Wells Fargo reported flat revenue growth for the most recent quarter, whereas Bank of America reported a 3.7% year-over-year improvement. The two banking giants should be able to grow revenue at mid to upper single-digits for the foreseeable future.
Conclusion
Based on historical trends and future economic conditions, traditional savings and loan banks may be generating lower sales. Yet, Bank of America may be able to cut costs in order to generate more earnings. The same may not apply to Wells Fargo because it is currently operating near record profit margins. It simply doesn’t need too.
JPMorgan Chase could grow revenue the fastest based on how its business is currently structured. Rising stock values will result in larger asset management and underwriting fees. Longer-term, JPMorgan Chase should generate revenue growth by increasing its consumer and commercial lending activities. Perhaps it’s time you took a look at some of these big banks; you might be surprised with what you find.
The article Bank of America Generates Substantial Profits originally appeared on Fool.com.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co (NYSE:JPM)., and Wells Fargo. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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