Bank of America (BAC) reported an 18% drop in profits for the first quarter of the year, highlighting the challenges faced by major banks due to high interest rates. The bank’s net interest income fell by 3% from the same period last year, as higher deposit costs offset higher asset yields and modest loan growth.
Net interest income, which measures the difference between what a bank earns on its loans and other assets versus what it pays out on deposits, is a critical contributor to profits for all banks. This revenue source has been under pressure due to the Federal Reserve’s higher-for-longer interest rates, which have forced lenders to pay more to retain their depositors.
Bank of America is not alone in this predicament. Other banking giants such as JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) have also reported challenges with this revenue source.
One indicator of how higher deposit rates are impacting Bank of America is the 16% fall in its non-interest bearing deposits to $520.6 billion. The rate it paid on US interest-bearing deposits rose to 2.53% in the first quarter, up from 1.28% a year earlier.
Despite the challenges, there were some bright spots for Bank of America. Its Wall Street operations saw a rise in revenue for investment banking, trading, and wealth management, outperforming analyst expectations. Trading and wealth management rose more than 2% and 5% respectively, while investment banking revenue of $1.57 billion was 35% higher compared with last year.
CEO Brian Moynihan noted that the bank’s wealth management team generated record revenue, with record client balances, and investment banking rebounded. He added that Bank of America’s sales and trading businesses continued their strong 2023 momentum this quarter, reporting the best first quarter in over a decade.
In conclusion, while high interest rates pose significant challenges for major banks, there are still areas of growth and opportunity, as demonstrated by Bank of America’s performance in investment banking and wealth management.
