By Dan Freed and Sruthi Shankar
(Reuters) - Bank of America Corp (BAC.N) reported a 19 percent drop in second-quarter profit on Monday and set a new expense target as growth in businesses from lending to trading failed to offset the impact of persistently low interest rates.
Like other lenders, the Charlotte, N.C.-based bank has been struggling under the weight of low rates for years, but analysts say Bank of America is particularly sensitive to the issue because of how management has positioned its balance sheet. Accounting oddities related to interest rates also dented the bank's profit during the quarter.
On conference calls following the results, senior executives said the bank is doing all it can to offset the impact of low rates - including keeping a tight lid on costs.
Chief Executive Brian Moynihan announced a new expense target of $53 billion for 2018. Bank of America did not previously have an annual expense goal, but this one is $3.3 billion less than its total expenses over the past four quarters. It comes after BofA has spent years of working through a sweeping cost-cutting project dubbed "New BAC" and an ongoing efficiency initiative called "Simplify and Improve."
"The question is, can we grow earnings without rates improving?" Moynihan said. "We believe we surely can."
The bank's shares closed 3.3 percent higher at $14.11 on Monday following its results.
Bank of America isn't alone in its struggle to boost earnings without a lift from higher rates. Its decline in profits, despite loan growth, mirrored that of rivals that have reported results lately, including JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N) and Citigroup Inc (C.N).
After keeping rates near-zero for seven years, the U.S. Federal Reserve bumped its target slightly higher last December. But optimism has faded that rates will continue moving upward in the near-term, especially after Britain's shocking vote to leave the European Union.
BofA, the second-largest U.S. bank by assets, reported a 12-percent decline in net interest income - a measurement of how much a bank can earn by lending and investing its deposits and other funds. The decline underscores how difficult it was to boost earnings in a low-rate environment.
The bank was also hurt by its choice some years ago of an accounting method known as FAS 91. The method affects when it can report earnings from the ups and downs of interest rates, Chief Financial Officer Paul Donofrio said.
The method led Bank of America to adjust its income downward by $1 billion during the quarter. In the year-ago quarter, FAS 91 boosted Bank of America's results. Donofrio said he is considering whether to switch to another accounting method to avoid the earnings volatility it creates.
Separately, the bank also took a $200 million negative adjustment related to the value of its own debt. Altogether the adjustments hurt earnings by 6 cents per share.
Overall, Bank of America's net income attributable to BofA's common shareholders fell to $3.87 billion, or 36 cents per share, in the second quarter ended June 30, from $4.80 billion, or 43 cents per share, a year earlier. (http://bit.ly/29PfzH5)
Excluding special items, the bank earned 37 cents per share, beating the average analyst estimate of 33 cents, according to Thomson Reuters I/B/E/S.
Its adjusted revenue of $20.8 billion topped estimates of $20.4 billion, according to Thomson Reuters I/B/E/S.
The bank's ratio of expenses to revenue, excluding special items, was 62 percent in the second quarter, 2 percentage points better than the year-earlier period.
One of Bank of America's biggest expenses in recent years has been those related to litigation and regulatory settlements. Last quarter, it spent $270 million on legal issues, Moynihan said, adding that he expects legal costs to run about $300 million a quarter in the near term.
'CONSTANT REDUCTION IN PERSONNEL'
One way the bank is trying to reduce costs is by cutting expensive workers from its payroll.
Although Bank of America has slowed the pace of staff reductions significantly, it is getting more savings out of its measures by targeting "more highly paid managerial associates," Donofrio said. Each quarter, the bank has $50-100 million worth of severance costs related to those workers.
"It's a constant reduction in personnel through hard work and automation," said Moynihan.
Analysts said the bank's underlying profit was reasonably strong, given the environment. In a presentation, the bank said net income in each of its four key businesses grew, when stripping out the accounting adjustments and assets it is winding down.
Trading was particularly strong, as BofA handled high volumes following the vote in Britain, known as Brexit. Adjusted trading revenue rose 12 percent to $3.7 billion in the quarter. Fixed income, currency and commodities trading revenue rose 22 percent.
"Bank of America's 2Q results, while noisy, reflected a number of items that surprised positively," said Nomura analyst Steven Chubak.
Up to Friday's close of $13.66, Bank of America's shares had fallen about 19 percent since the start of the year. The KBW bank index (.BKX) fell 8 percent over the period.
(Reporting by Sruthi Shankar in Bengaluru and Dan Freed in New York; Writing by Lauren Tara LaCapra; Editing by Ted Kerr and Nick Zieminski)