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BofA's interest income drops even after Fed rate hikes

Bank of America's expected bonanza from rising interest rates has stalled.

[NEW YORK] Bank of America's expected bonanza from rising interest rates has stalled.

The lender, viewed as the most sensitive to rate changes among US banks, reported a surprise drop in net interest income in the second quarter, after a 7 per cent jump in the first three months of the year.

Its two largest rivals - JPMorgan Chase & Co and Wells Fargo & Co - posted increases in the quarter.

Chief executive officer Brian Moynihan has been trying to lower investors' expectations in recent months after earlier predicting that income derived from lending and holding securities would soar once the Federal Reserve started hiking interest rates.

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Even with the decline in interest income, second-quarter profit climbed from a year earlier as credit quality improved and trading was stronger than expected.

Interest income was hurt by the sale of a UK credit-card business and stagnating long-term interest rates. Net interest margin, the difference between what a bank charges for loans and pays depositors, fell five basis points to 2.34 per cent, the Charlotte, North Carolina-based bank said Tuesday in a statement.

After the Fed raised interest rates in December, Bank of America reported more than US$700 million in additional net interest income in the first quarter. It lowered guidance for the second quarter to a jump of US$150 million, even as the US central bank raised rates again in March.

Two months ago, Mr Moynihan told investors the increase in interest income would more likely be about US$50 million, because the bank sold the UK unit more quickly than expected and yields have been stubbornly low on long-dated Treasury bonds.

Bank of America expects interest income to increase in the third quarter, assuming growth in loans and deposits and a rise in long-term interest rates, according to a presentation on its website.

Investors have pushed up shares of Bank of America more than any other giant US lender since Donald Trump's election, betting it's poised for brighter days.

The firm has gained 41 per cent since Nov 8, compared with the 28 per cent advance of the 24-company KBW Bank Index. The lender's shares slipped 0.9 per cent to US$23.80 at 7.06am in early trading in New York.

Net income rose 10 per cent to US$5.27 billion, or 46 US cents a share, from US$4.78 billion, or 41 US cents, a year earlier, according to the statement. The average estimate of 24 analysts surveyed by Bloomberg was for 43 US cents a share.

Total revenue climbed 7 per cent to US$22.8 billion from a year earlier, exceeding analysts' expectations of US$21.8 billion. Expenses rose 1.7 per cent to US$13.7 billion, compared with estimates of US$13.6 billion, largely tied to the costs of selling some data centres and increased severance pay.

The bank generated US$11.2 billion in net interest income, using the adjusted figure analysts tend to prefer to show fully taxable equivalence. That was down from the first quarter and missed analysts' estimates of US$11.3 billion.

Fixed-income trading revenue declined 14 per cent to US$2.11 billion, a smaller less than analysts expected, while equities trading rose 2.1 per cent to US$1.1 billion.