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Bank of America shares dropped Tuesday after executives said the lender's net interest income growth was fading because of declining interest rates and a slowing U.S. economy.
Despite posting a record first-quarter profit driven by cost cuts and strength in the bank's Main Street lending operations, shares of the company fell 2.6% after the first hour of trading. It recovered most of its losses by 12:55 p.m., when the stock was down 0.22 percent.
The stock decline steepened after Chief Financial Officer Paul Donofrio issued guidance on net interest income during a conference call with analysts. He said that NII grew 6% last year under more favorable conditions.
"The economy is expected to grow more moderately in 2019 and rate expectations have been lowered, plus we have some seasonable headwinds in Q2," Donofrio said. "Ultimately, we expect NII for the full year of 2019 to be up roughly half the pace of 2018. This perspective assumes today's forward curve and loan and deposit growth consistent with the current economy."
The slowing growth in net interest income, a core way that banks make money, is one of the biggest worries of the industry's investors. Bank stocks have struggled in recent weeks as the Federal Reserve shifted gears and indicated it could be done raising rates this year. Combined with signs of a global economic slowdown, that has led to falling long-term interest rates, crimping the industry's profit margins.
Last week, Wells Fargo shares tanked after its CFO lowered guidance for net interest income for 2019, saying it would declined 2 percentage points to 5%.
Bank of America said earlier Tuesday that first-quarter profit rose 6% to $7.3 billion, or 70 cents a share, exceeding analysts' estimates of 66 cents a share. Revenue was roughly unchanged from a year earlier at $23 billion, essentially meeting analysts' estimates.
Under CEO Brian Moynihan, the megabank delivered its second straight record quarterly profit while methodically working costs down. Expenses fell 4% to $13.2 billion, almost $500 million below analysts' estimates. The bank's record profits have come despite tough conditions for Wall Street trading desks.
"Economic growth and consumer activity in the U.S. continue to be solid, businesses of every size are borrowing and driving the economy, and asset quality is strong," Moynihan said in the earnings release.
The company's net interest yield, a key metric of profitability for a bank's core lending activities, rose 9 basis points to 2.51%, edging out analysts' 2.48% estimates. Loans across its consumer and commercial businesses rose at least 3%, while deposits rose 5% to $1.4 trillion.
Those factors were most evident in the bank's biggest division, its consumer lending business, which posted a 25% increase in profit to $3.2 billion. It managed that feat by boosting revenue in the business 7% to $9.6 billion while reducing costs by almost $200 million.
That helped offset a weak quarter in its global markets division, where profit slumped 26% to $1 billion. Revenue dropped 13% on weak trading results and lower investment banking fees. Equities trading revenue fell 22%, while fixed income declined 8%.
The bank's other two divisions generated positive results. Its global banking business posted a 2% profit increase to $2 billion. Wealth management profit rose 14% to $1 billion.
Now in his 10th year leading Bank of America, Moynihan has focused on trimming costs while looking for profit opportunities that fit his "responsible growth" mantra.
More recently, he announced that the company's success will be shared with employees: The bank is raising its minimum wage to $20 an hour over the next two years, the highest rate among the megabanks.
To tighten its grip on retail banking customers, Bank of America is also planning to release a digital financial coach for its 66 million customers in the fall.
The bank's shares have climbed more than 20% this year, outperforming most of its peers and the KBW Bank Index.
Here's what Wall Street expected: