Bank of America joins rivals in setting aside billions for loan losses

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Bank of America followed two big rivals in setting aside billions of dollars for loans likely to sour amid an almost total U.S. economic shutdown.

Profit plunged 45% in the first quarter from the same period last year as the company allocated $4.76 billion for loan losses, the most since 2010, as businesses and households reel from the coronavirus pandemic. The bank joins competitors JPMorgan Chase and Wells Fargo, which posted their highest provisions in a decade Tuesday. The three lenders have collectively stashed away more than $17 billion to cover defaults.

Banks are trying to get ahead of loan losses they expect to come from the pandemic bringing large swaths of the global economy to a virtual standstill. While defaults haven’t yet spiked in a meaningful way, bank efforts to build up their reserves show they’re bracing for a severe recession.

“Despite increasing our loan loss reserves, we earned $4 billion this quarter, maintained a significant buffer against our most stringent capital requirement, and ended the quarter with more liquidity than when we began,” Chairman and Chief Executive Brian Moynihan said in a news release.

The bank’s shares dropped 2.6% to $23.11 at 6:54 a.m. in early New York trading. The stock was down 33% this year through Tuesday.

Moynihan has been a prominent voice in business since the COVID-19 crisis began, appearing alongside other bank CEOs at the White House in early March to discuss its economic impact. He’s pledged to retain staff and boost pay, and highlighted the lender’s forbearance efforts and its participation in the government’s small-business rescue program.

It hasn’t all gone smoothly. Despite being the first bank to accept applications for the rescue program, the company is fending off a lawsuit for favoring existing borrowers. Last week, CNBC and The New York Times reported Bank of America’s sales and trading staff are facing pressure to come to the office even as they become increasingly concerned about the spread of the virus.

The bank’s first-quarter provision for credit losses was almost five times the $1 billion it set aside a year earlier. On top of the worse economic picture, banks are adopting a new accounting standard this year known as CECL, which requires them to set aside provisions earlier in a cycle.

Net interest income — revenue from customers’ loan payments minus what the company pays depositors — fell 2% to $12.1 billion in the first quarter. On a fully taxable-equivalent basis, the figure was $12.3 billion, exceeding the $11.7 billion average estimate of nine analysts in a Bloomberg survey. Trading revenue jumped more than expected as the firm benefited from volatile markets and active clients.

Chief Financial Officer Paul Donofrio said in January that he expected net interest income to be lower in the first half as the Federal Reserve’s rate cuts work their way into the bank’s results. That was well before the Fed made additional emergency rate cuts in response to the coronavirus-related shutdowns across the country.

Also in the first-quarter results:

  • The bank’s efficiency ratio, a measure of profitability, remained at 59%, the same as in the fourth quarter of 2019.
  • Net income fell to $4.01 billion from $7.31 billion a year earlier. Earnings per share totaled 40 cents, missing the 54-cent average estimate of 19 analysts.
Bloomberg News
Earnings Credit quality Consumer lending Commercial lending Bank of America Brian Moynihan Coronavirus
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