NEW YORK — Bank of America said Friday its second-quarter net income rose 15 percent to $2.78 billion as improvements in the company's consumer loan businesses made up for a drop in trading revenue.
The bank's results beat expectations and provided further evidence that losses from failed loans at the nation's big banks may have peaked in the first half of 2010. Bank of America says it reserves to cover losses from loans fell 17 percent from the first quarter of this year and 39 percent from a year ago. Citigroup Inc. on Friday and JPMorgan Chase & Co. on Thursday also reported improvements in their consumer loan businesses.
In a statement, Bank of America chief executive Brian Moynihan said the company's "credit quality improved even faster than we expected." Bank CEOs have been cautious throughout the aftermath of the 2008 financial crisis when reporting progess in their loan businesses. Economists and investors are looking to those loan loss levels as an indicator of how well the economic recovery is faring.
Bank of America's second-quarter net income, which reflected the payment of dividends on preferred stock, amounted to 27 cents per share. A year ago, the bank earned $2.42 billion, or 33 cents per share. Analysts expected profit of 22 cents per share in the most recent quarter, according to Thomson Reuters. Revenue totaled nearly $30 billion in the quarter, down 11 percent from a year ago.
Despite the higher profit, investors took a dim view of the company's results. Bank of America's stock fell $1.16, or 7.54 percent, to $14.23.
One concern for investors: how banks will make money going forward amid lower trading profits, weak loan demand and tighter federal oversight following the passage of the sweeping financial overhaul legislation.
"There's a lot of headwinds facing the banks, and investors are clearly worried about where the revenue will come from," said Shannon Stemm, a financial services analyst with Edward Jones.
Revenue in the company's trading business, which includes the Merrill Lynch operation, fell 42 percent from a year ago to $6 billion because of the steep dive the stock market took during the spring. Citigroup and JPMorgan Chase reported a similar slump in trading income.
The Standard & Poor's 500 index, considered the best measure of how stocks have fared, fell 11.9 percent from April through June, its worst showing since the financial crisis devastated stocks in the fourth quarter of 2008. All the banks with big trading operations, particularly Goldman Sachs and Morgan Stanley, are expected to report a drop in their income from those businesses.
Bank of America said revenue from trading of bonds, currencies and commodities fell $500 million from a year ago to $2.6 billion as the European debt crisis roiled financial markets. Revenue from stock trading fell $300 million to $1 billion.
In a conference call with analysts, Moynihan said the bank nimbly adjusted its trading positions during the Europe debt crisis but said "we have to be much stronger risk managers" going forward.
Moynhihan said the bank expects economic growth at an annual rate of 2.5 percent in the second half of the year. That's more bearish than the Federal Reserve's recently reduced forecast of between 3 percent and 3.5 percent growth for 2010.
"Our experts don't believe there will be a double dip," or the economy falling back into recession, Moynihan said. Still, he added that the bank is worried about slowing momentum in consumer spending and is monitoring the housing market for more signs of weakness that could pressure profits and revenue.
The Charlotte, N.C.-based bank was among the hardest hit during the credit crisis, and received $45 billion in bailout funds from the federal government including $20 billion for Merrill Lynch. It repaid the money last year. Like nearly all banks in the country, the company faced waves of loan defaults as more customers fell behind and investments soured.
The defaults have slowed but remain elevated, leaving banks will billions in losses and making them reluctant to lend. And many consumers and small businesses are unwilling to take on more debt, a trend that reduces demand for loans.
But the improving credit picture at Bank of America and JPMorgan offers hope that the economic recovery is taking hold and that banks' lending businesses could be returning to normal.
Both Bank of America and JPMorgan added money to their reserves against loan losses loans during the second quarter, but the amounts fell sharply. That means fewer Americans are falling behind on their loans for homes, credit cards and other items.
Still, overall demand for credit remains "weak," Moynihan said. Bank of America extended $174 billion in credit during the second quarter. Most of the money financed first mortgages and commercial real estate. However, Moynihan said business clients are saving money, not borrowing, as they wait for signs of a robust recovery.
"They tell us that they are reluctant to expand due to uncertainty they see in the future," Moynihan said.
An increase in loan demand from small and midsize businesses is crucial to ensuring a sustainable recovery.
A big question for Bank of America and other big banks is how the sweeping financial overhaul legislation will affect profits. Congress on Thursday passed the bill, the stiffest restrictions on banks since the Great Depression. The new rules on everything from capital levels to debit cards and trading of risky securities are aimed at preventing a repeat of the 2008 financial crisis.
Moynihan said it will take time to adapt to the new rules and didn't rule out adjusting customer fees to offset the expected hit to revenue.
"All those (options) are on the table," Moynihan said.