BofA sets aside $500m reserve for energy losses

Bank of America became the latest bank to disclose damage done by the tumbling oil price, estimating a persistently low crude price could cost it about $700m over the next two years.

Concerns about Bank of America’s energy exposure overshadowed better than forecast earnings published on Tuesday, which were helped by cost cutting and a boost in sales from its trading business.

Bank of America, which has $21.3bn in energy-related loans, followed rivals JPMorgan Chase, Citigroup and Wells Fargo in cautioning about loans to oil and gas companies.

The second-largest US bank has set aside $500m in reserves to soak up losses from the sector. Paul Donofrio, finance director, forecast they could come to $700m if oil stayed at $30 a barrel for nine quarters.

But he added: “There are a lot of people who are helped by oil prices — that help our asset quality, not only the consumer side but also in places like India and manufacturers all around the world.”

Overall, Bank of America boosted quarterly profits by almost a tenth. Cost cutting helped improve the bank’s performance, with expenses down 2 per cent from a year ago. The headcount has fallen about 10,000 over the past year.

The bank also bucked a downward trend across much of Wall Street to boost sales from its trading business. Revenue from the bank’s sales and trading operation rose 11 per cent from a year ago. Overall sales, net of interest expense, improved 4 per cent to $19.8bn. The bank is short of its target for generating returns. Its return on average tangible common equity of 7.3 per cent was short of its 12 per cent goal.

For years the bank disappointed investors with hefty mortgage losses and litigation problems. But Mr Donofrio said it was the fourth consecutive quarter the bank had produced higher earnings. “We’ve been operating in the past six years in an extraordinary market environment with [interest] rates that have been unprecedentedly low,” he said.

“We feel comfortable about getting to our goals,” added Mr Donofrio, who replaced Bruce Thompson in August. “We’re going to get there. It’s just going to take time and we’re going to need a little help from rates.”

The bank, based in Charlotte, North Carolina, generated net income of $3.3bn in the last three months of 2015, up 9 per cent from a year ago.

That was equivalent to earnings per share of 28 cents, up from 25 cents a year earlier. Analysts had expected 27 cents.

Two accounting charges weighed on the results. Pre-tax income took a $600m hit after the bank decided to redeem $2bn worth of trust preferred securities. An exceptional UK tax charge cost it another $300m.

The fourth-quarter figures cap an eventful year for the bank. Brian Moynihan, chairman as well as chief executive, won a shareholder vote over a corporate governance proposal that would have taken away his chairmanship.

BofA was also required to resubmit its “stress test” to the Federal Reserve. In December the US central bank waved through the bank’s capital plan, allowing it to pay a 20 cent annual dividend and buy back $4bn worth of stock.