Bank of America posted a bigger-than-expected 70 percent jump in quarterly profit on Wednesday, helped by aggressive cost-cutting, as Chief Executive Brian Moynihan's turnaround efforts showed early signs of paying off.
Revenue rose 3.5 percent at the nation's second-largest bank, lagging increases of 11 percent at Citigroup and 14 percent at JPMorgan Chase. But Bank of America cut operating expenses 6 percent, while expenses grew at JPMorgan and Citigroup.
Bank of America unveiled an initiative in 2011 that aimed to save $8 billion a year, and by the fourth quarter of 2013 it hopes to have cut costs by $1.5 billion per quarter. Wednesday, the bank said it was on track to meet those goals and was ahead of schedule on cutting costs from bad mortgage assets. The bank's shares were up more than 3 percent in afternoon trading (Click here for the latest price).
"They've made excellent strides at cost control," said Joe Terril, president of Terril & Co, which manages $650 million and owns Bank of America shares.
"People are going to be surprised if we can get a little stronger economy, if Bank of America can get these legal and regulatory issues behind them, at the type of revenue and earnings that this bank can show," he added.
While most of the bank's businesses generated more income, the revenue picture was mixed. In consumer and small business banking, revenue fell by nearly 1 percent, while in consumer real estate services, revenue dropped 16 percent. In retail brokerage and asset management, investment banking and sales and trading, revenue rose.
Speaking to investors last quarter, Moynihan said that with the bank getting its expenses and bad assets under control, management would work more on boosting revenue and improving operations.
"As the other issues go away, this is what the team has to be focused on," he said.
(Read more: Enjoy it while it lasts: Bank earnings face trouble)
Bank of America paid about $2.5 billion for mortgage lender Countrywide Financial in 2008, at the height of the housing crisis, but since then it has paid and paid again for the company. Analysts estimate Bank of America has lost more than $40 billion from bad mortgages, litigation, and settlements with regulators linked to Countrywide mortgages.
In a sign of the progress the bank is moving past bad mortgages, Bank of America forecast that its fourth-quarter expenses for what it calls "legacy assets and servicing" would be below $2 billion, less than its prior forecast of $2.1 billion. That expense level was $2.3 billion in the second quarter.
Net income for common shareholders in the second quarter rose to $3.57 billion, or 32 cents per share, from $2.10 billion, or 19 cents per share, a year earlier. Revenue, net of interest expense, rose to $22.73 billion from $21.97 billion.
Analysts, on average, expected earnings of 25 cents per share, according to Thomson Reuters I/B/E/S.
With bond markets having weakened in the second half of the quarter, a portfolio of the bank's investments, known as the "available for sale portfolio," generated big losses, adding $4.2 billion of losses to the bank's balance sheet. These losses more than offset the bank's earnings gains, resulting in Bank of America's net worth, as measured by its shareholders equity, falling to $231.03 billion from $237.29 billion in the first quarter.
Sales and trading revenue rose to $4.15 billion in the second quarter, excluding an accounting adjustment, from $3.73 billion a year earlier. Income in its global markets unit soared to $935 million from $595 million, excluding an accounting adjustment that allowed the bank to book gains and losses based on changes in the value of its own debt.
The sales and trading results were driven by equities sales and trading, where revenue, excluding the adjustment, rose 53 percent to $1.2 billion.
(Read more: Citigroup earnings, revenue top expectations)
But fixed income, currency, and commodities sales and trading revenue fell by $296 million to $2.3 billion. Most other banks posted gains in bond trading, even as yields rose during the quarter. But changes in bond yields hurt Bank of America's mortgage-backed securities business.
Bank of America's operating expenses fell to $16.02 billion from $17.05 billion in the same quarter last year.
Bank of America shares had risen nearly 20 percent this year through Tuesday, below the 25 percent increase in the KBW bank index.
Net interest margin, a measure of the profitability of its loans, rose to 2.44 percent from 2.21 percent a year earlier.
Rising interest rates should alleviate pressure on margins, but that trend will take time to offset capital declines from rising yields.
On a conference call with investors, Chief Financial Officer Bruce Thompson said it should take about three years for the bank to earn enough net interest income to offset the hit to its capital.