Bank of America embodies the dominant question facing most financial institutions: in a weak consumer economy, where is the growth going to come from?
B of A's first-quarter profit of $3.4 billion, announced Wednesday, was its best in more than a year. The result stemmed largely from far lower legal bills and expenses for legacy mortgage issues, which were $238 million this quarter compared with $4.9 billion a year earlier.
Yet as B of A's legal problems and crisis-era costs finally wane, its core banking activity continues to struggle. Cost cuts helped B of A make up some of the lost ground in the first quarter, but revenue declined by 6% year over year, to $21.2 billion.
"From the top of the house, revenue remains challenging in an environment with below-trend economic growth and the rate environment which comes from that," Chairman and Chief Executive Brian Moynihan said on an earnings conference call with analysts.
Granted, two special items worsened the revenue picture. Noninterest income dropped 6%, to $11.8 billion, because B of A's years-long divestment of holdings in other companies' stock has nearly wiped out equity income. B of A also took a nearly $500 million accounting loss from prepayments on debt it holds.
Looking past these quarterly hits, and noting the continued decline in B of A's once-massive legal costs, Moynihan forecast "more predictable earnings with more improvement expected ahead."
But where that improvement will come from is unclear. Revenue still fell 1% even if one excludes the equity-income and debt-prepayment items.
B of A's core-banking business put up some weak numbers. Its net interest margin declined by 12 basis points from a year earlier, to 2.17%, and its net interest income was down 6%, to $9.7 billion.
Loans fell by 4%, to $878 billion. Mortgage banking revenue was one bright spot, however, rising 69% to $694 million.
The pressure on B of A's traditional banking business did not surprise most investors, after JPMorgan and Wells Fargo both showed sharper-than-expected yield compression in their results this week. B of A's stock was down slightly more than 1% as of Wednesday afternoon.
But margin pressure may be harder to bear for B of A than for its peers. JPM and Wells were both able to increase their revenue in the first quarter, through exceptionally strong bond-trading income in JPM's case and a variety of commercial-focused businesses in Wells'.
B of A fallback options fared poorly. In the first quarter, its investment banking income was flat at $1.5 billion, and wealth-management income fell 11% from a year ago, to $651 million. Sales and trading revenue was $3.9 billion, up from the previous quarter but 5% less than in the first quarter of 2014.
"This is a good quarter to have trading and investment banking, and B of A has them, but not to the extent that JPM, Citigroup and some others do," Sandler O'Neill analyst Jeff Harte said.
Instead, B of A has relied heavily on costs cuts. This continued in the first quarter, with noninterest expenses down 30%, to $15.7 billion, compared with a year earlier.
The bank has cut its headcount by 8% in the past year, to a little under 220,000 employees a level it had not seen since before the crisis.
"To put it in a broad context, we are approaching employment levels where we were in early 2008 prior to bringing in over 100,000 people from the Countrywide and Merrill [Lynch] acquisitions," Moynihan said.
Yet as in the previous quarter some analysts expected more. Moynihan's broad expense-cutting initiative, an $8 billion program called "New BAC," ended last year, and observers wonder if the bank can keep up the pace of cost cuts.
"Given the revenue headwinds, B of A's earnings growth is dependent on them getting more efficient over time," Harte said. "To the extent that the cost saves are slowing, it makes it all the harder to see earnings growth beyond what we're looking for."
Even with lower-than-expected legal costs, the bank's noninterest expense did not decrease as much as some analysts had forecast. The lower-than-expected costs for legacy issues raise questions as to "why core [earnings per share] does not improve more while it achieves these savings," CLSA analyst Mike Mayo wrote in an earnings note Wednesday.
The bank's capital-planning difficulties have added to expenses. Last month the Federal Reserve ordered B of A to resubmit its capital plan, and on Wednesday Moynihan said the bank was planning to do so in September.
This resubmission will cost an additional $100 million, B of A said Wednesday. Moynihan said the bank has put fix-it executive Terry Laughlin in charge of resubmitting the exam and improving the bank's Comprehensive Capital Analysis and Review processes for the future, after the second consecutive year that B of A has had a CCAR hiccup.
Laughlin, the bank's president of strategic initiatives, previously led B of A's efforts to clean up its mortgage business. He "has retained a team of external experts [and] increased the internal staffing to ensure we are successful" on the resubmission, Moynihan said.