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BofA Jumps On Solid Beat Thanks To Jump In Trading Revenue, Reserve Releases

BofA Jumps On Solid Beat Thanks To Jump In Trading Revenue, Reserve Releases

One day after stellar Q1 earnings reports by JPMorgan and Goldman and the latest clunker from Wells Fargo, this morning Bank of America was so eager to demonstrate..

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BofA Jumps On Solid Beat Thanks To Jump In Trading Revenue, Reserve Releases

One day after stellar Q1 earnings reports by JPMorgan and Goldman and the latest clunker from Wells Fargo, this morning Bank of America was so eager to demonstrate that it was no slouch, it posted earnings about 2 hours early, its Q1 report hitting just after 520am ET, when it also reported big beats on the top and bottom line thanks to a solid jump in better-than-expected trading revenue, echoing the releases from JPMorgan and Goldman. And while CEO Brian Moynihan flagged better credit costs and progress in the pandemic, which he said points to an accelerating recovery, he conceded that “low interest rates continued to challenge revenue.” And in a hint of Wells Fargo, BofA's net interest yield slid to 1.68% from 2.33% a year earlier, trailing an estimate of 1.71%.

Here are the Q1 details:

  • Revenue $22.82BN, beating exp. of $22.13BN, and up fractionally 0.2% Y/Y
  • EPS $0.86, beating exp. of $0.66, up more than 100% from $0.40 Y/Y

Net income of $8.1 billion increased by 47%, driven by reserves release and higher non-interest income, partly offset by higher expenses.

Like JPM and Wells, the generous bottom line beat was facilitated by a jump in reserve releases, which increased to $2.7BN in the quarter, up from $0.8BN in Q4, and a sharp reversal from the loan loss reserve increase of $3.6BN a year ago.

Visually:

Digging into the asset quality and the reserve release, BofA disclosed that its provision benefit (recovery of credit losses) of $1.86B - far above the $473.5MM expected - included a $2.7B net reserve release reflecting an improved macroeconomic outlook and balance declines, offset by $823MM in Net Charge Offs.

  • Consumer reserve release of $1.4B, primarily driven by Card
  • Commercial reserve release of $1.2B
  • "The reserve assessment continues to factor in the uncertainty resulting from the unprecedented nature of the current health crisis and risks that may prevent full recovery"

Meanwhile, total net charge-offs of $823MMdecreased $58MM from 4Q20, and we down $300MM from a year ago. Consumer net charge-offs of $693MM increased $211MM, driven by Card due to expired deferrals, but were $179MM lower than 1Q20

After the reserve release, BofA's allowance for loan and lease losses of $16.2B represented 1.8% of total loans and leases, while the total allowance of $18.0B included $1.8B for unfunded commitments; nonperforming loans (NPLs) increased $0.2B from 4Q20, driven by consumer real estate due to deferral activity.

So with the bank's reserves out of the way, attention immediately turned to the bank's trading group, where it followed in JPM and GS footsteps, with stellar results, as follows:

  • Sales and Trading revenue excluding DVA $5.08 billion, +17% y/y, beating estimates of $4.37 billion
  • FICC trading revenue excluding DVA $3.25 billion, +22% y/y, beating estimates of $2.73 billion;
    • According to the bank, "the 22% revenue jump reflected a strong performance in credit, mortgage, and municipal products, and gains in commodities (partially offset by related losses in another segment) from market volatility driven by a weather-related event, partially offset by reduced activity in other macro products"
  • Equities trading revenue excluding DVA $1.83 billion, +9.9% y/y, beating estimates $1.64 billion; and was "driven by a strong trading performance in cash"

Incidentally, the “market volatility driven by a weather-related event.” is surely linked to the Texas freeze that roiled energy markets and left swaths of the U.S. without electricity in February.

To be sure, there was a modest disappointment in BofA's equity trading increase, which at 10% was well behind peers such as JPM and Goldman.

Also notable, the bank's average VaR of $74MM in 1Q, up from 48 a year ago, reflected "higher implied volatilities related to the COVID-19 pandemic observed in 2020."

Meanwhile, investment banking revenue $2.25 billion, smashed estimates $1.83 billion, and increased $0.9B, or 62%, from 1Q20, "driven by equity underwriting and advisory fees", with record equity underwriting fees of $0.9B, up 218% YoY and a 49% increase in advisory fees of $0.4B.

Going back to BofA's core Interest Income business, there was some disappointment in the bank's Net Interest Income, which while not quite as bad as Wells, came in at $10.31 billion, down a whopping 16% y/y due, and missing the estimate of $10.32 billion. According to the bank, NII decreased "$56MM from 4Q20, primarily driven by lower loan balances, two fewer accrual days and higher premium amortization  expense, partially offset by higher investment securities balances due to the deployment of excess cash."

Meanwhile, the Net Interest Margin (or Yield) also declined to 1.68% from 1.71%, missing the 1.71% estimate, although the bank was quick to point out that "excluding Global Markets, net interest yield stable at 1.90%."

The bank also noted its sensitivity to a +100 bps parallel shift in interest rate yield curve which it estimated to benefit net interest income by $8.3B over the next 12 months. Of course, the opposite is true as well if rates decline again.

BofA's Capital looked good, with the CET1 ratio increasing by about 100 basis points from the same quarter last year.

Meanwhile, in Consumer banking, income of $2.7 billion increased by 50%. Lower provisions for credit losses were the driver, and reflected a strong reserve release. The bank said credit quality remained strong.

The chart belos shows the trends in consumer banking. The trend in loans and leases is downward, echoing JPMorgan’s comments yesterday on weaker loan demand. Yet consumers kept investing assets, with the amount rising to $324 billion from $212 billion.

And also similar to JPM, costs jumped: non-interest expenses at the lender rose 15% to $15.5 billion, driven by costs including those linked to Covid-19, special compensation awards for associates and charges for shrinking the real estate footprint: “We saw strong growth in our capital markets and wealth management businesses, which allowed us to absorb additional expenses,” CFO Donofrio said in the earnings statement. Compensation expenses of $9.74 billion, up 17% y/y and the highest in years, that were sharply higher than the estimate of $8.51 billion. In fact, they were higher than the highest estimate of $9.19 billion.

And also similar to JPM, while total loans continued to decline, and shrank 8% YoY to $908MM...

... while average deposits surged by 25% to $1.8 trillion, as the Fed's non-stop liquidity injections have to be parked somewhere.

In other words, the deposit-vs-loans divergence continued at BofA as deposits rose 25% to $924 billion while loans fell 8% to $291 billion in consumer banking.

Keeping an eye on lending ratios: total loans and leases as a percentage of the bank’s total assets continue to decline, courtesy of the Fed:

  • 2021 Q1: 30%
  • 2020 Q4: 32%
  • 2020 Q1: 40%

Bank of America also announced a $25B Stock Buyback Plan, adding that it expects to distribute additional capital to holders. This, however, was simply the board increasing the open-ended authorization, while actual capital return is limited by the Fed and the stress-test process.

Commenting on the results, CFO Paul Donofrio said “we believe our strong balance sheet, the diversity of our business lines, and the careful way we have managed risk for many years should enable us to continue to return to our shareholders the excess capital that is not needed to support economic growth, deliver for customers and communities, invest in our future and sustain strength and stability through future economic cycles.”

Meanwhile, CEO Brian Moynihan flagged better credit costs and progress in the pandemic, which he said points to an accelerating recovery.  However, Moynihan said that “low interest rates continued to challenge revenue.” And the bank’s net interest yield slid to 1.68% from 2.33% a year earlier, trailing an estimate of 1.71%.

Commenting on BofA's result, Atlantic’s John Heagerty said that BofA’s results were similar to those at peer banks, with a “sizable beat based largely on reserve releases and strong trading & IB revenues.” He added that wealth management revenues topped his forecasts, while the bank’s net interest margin decline was more modest than others, and “credit quality remains excellent.”

“Overall, this looks like a good result and BAC is very well positioned to benefit from the ‘accelerating recovery.”'

Investors agreed, and Bank of America shares rose about 2% in pre-market trading, after an earlier-than-expected earnings release showed better-than-expected trading revenue.

The full investor presentation is below (pdf link)


Tyler Durden Thu, 04/15/2021 - 08:05

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International

The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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Spread & Containment

A major cruise line is testing a monthly subscription service

The Cruise Scarlet Summer Season Pass was designed with remote workers in mind.

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While going on a cruise once meant disconnecting from the world when between ports because any WiFi available aboard was glitchy and expensive, advances in technology over the last decade have enabled millions to not only stay in touch with home but even work remotely.

With such remote workers and digital nomads in mind, Virgin Voyages has designed a monthly pass that gives those who want to work from the seas a WFH setup on its Scarlet Lady ship — while the latter acronym usually means "work from home," the cruise line is advertising as "work from the helm.”

Related: Royal Caribbean shares a warning with passengers

"Inspired by Richard Branson's belief and track record that brilliant work is best paired with a hearty dose of fun, we're welcoming Sailors on board Scarlet Lady for a full month to help them achieve that perfect work-life balance," Virgin Voyages said in announcing its new promotion. "Take a vacation away from your monotonous work-from-home set up (sorry, but…not sorry) and start taking calls from your private balcony overlooking the Mediterranean sea."

A man looks through his phone while sitting in a hot tub on a cruise ship.

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This is how much it'll cost you to work from a cruise ship for a month

While the single most important feature for successful work at sea — WiFi — is already available for free on Virgin cruises, the new Scarlet Summer Season Pass includes a faster connection, a $10 daily coffee credit, access to a private rooftop, and other member-only areas as well as wash and fold laundry service that Virgin advertises as a perk that will allow one to concentrate on work

More Travel:

The pass starts at $9,990 for a two-guest cabin and is available for four monthlong cruises departing in June, July, August, and September — each departs from ports such as Barcelona, Marseille, and Palma de Mallorca and spends four weeks touring around the Mediterranean.

Longer cruises are becoming more common, here's why

The new pass is essentially a version of an upgraded cruise package with additional perks but is specifically tailored to those who plan on working from the ship as an opportunity to market to them.

"Stay connected to your work with the fastest at-sea internet in the biz when you want and log-off to let the exquisite landscape of the Mediterranean inspire you when you need," reads the promotional material for the pass.

Amid the rise of remote work post-pandemic, cruise lines have been seeing growing interest in longer journeys in which many of the passengers not just vacation in the traditional sense but work from a mobile office.

In 2023, Turkish cruise line operator Miray even started selling cabins on a three-year tour around the world but the endeavor hit the rocks after one of the engineers declared the MV Gemini ship the company planned to use for the journey "unseaworthy" and the cruise ship line dealt with a PR scandal that ultimately sank the project before it could take off.

While three years at sea would have set a record as the longest cruise journey on the market, companies such as Royal Caribbean  (RCL) (both with its namesake brand and its Celebrity Cruises line) have been offering increasingly long cruises that serve as many people’s temporary homes and cross through multiple continents.

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