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BofA Raises Forecast for Interest Income as Profit Climbs 43%

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Bank of America Corp. boosted its forecast for interest income after reporting that fourth-quarter profit rose 43% on improvements in credit quality and continued cost-cutting.

Net interest income is expected to increase by about $600 million in the first quarter, Chief Financial Officer Paul Donofrio said Friday on conference call with analysts, helped by the Federal Reserve’s quarter-point rate hike in December. The Charlotte, North Carolina-based lender said revenue from interest-related products rose 6.3% to $10.3 billion in the fourth quarter.

Fixed-income trading revenue climbed to $1.96 billion, the company said in a statement, missing analysts’ $2.1 billion average estimate. While mortgage-bonding trading was strong, there was less activity municipal debt and government securities, Donofrio said on a call with journalists. Equity trading rose 11% to $948 million, in line with analysts’ predictions.

Bank of America shares advanced 1.4% to $23.25 at 10:18 a.m. in New York. The stock has gained 37% since Nov. 8 — the most among large U.S. lenders — as President-elect Donald Trump’s victory fueled investor expectations that financial firms would benefit from rising interest rates and relaxed regulation.

“Management’s guidance was more positive than what is in our forecast, so we believe the stock will outperform on a relative basis,” Keefe, Bruyette & Woods analysts led by Brian Kleinhanzl wrote in a note to clients.

Chief Executive Officer Brian Moynihan has been cutting costs for years while contending with persistently low interest rates. That’s starting to pay off as Wall Street firms benefit from a rebound in fixed-income trading and the company moves beyond epic legal claims over mortgages that soured in the financial crisis. The bank last year  set a target of $53 billion in annual expenses by the end of 2018, or about 8% less than 2015.

Tax Benefit

Net income rose to $4.7 billion, or 40 cents a share, from $3.28 billion, or 27 cents, a year earlier. The results were helped by a net tax benefit of about $500 million. Earnings per share — excluding the tax benefit and accounting adjustments — were 37 cents. The average estimate of 29 analysts surveyed by Bloomberg was for adjusted earnings of 38 cents a share.

Total revenue increased 2.1% to $20 billion, missing estimates by about $800 million. Expenses fell 6%, more than expected, to $13.2 billion, helped by declines in compensation and data-processing costs.

“Revenue growth remains challenged,” Eric Wasserstrom, a Guggenheim Securities LLC analyst, wrote in a note to investors. Revenue “will be driven increasingly by improvements in rate conditions rather than idiosyncratic drivers,” he said.

Provisions for loan losses fell $36 million from the previous quarter to $774 million, better than analysts estimated, while net write-offs dropped by $220 million to $880 million. The bank also released about $106 million of reserves for bad loans as energy and consumer real estate improved.

NIM Unchanged

The lender revised earnings for recent years on Oct. 4 to reflect a change in the way it accounts for certain securities held in its investment portfolio. The move brings it in line with other Wall Street firms and may reduce swings in quarterly earnings, the bank said. The firm also dissolved a business segment created in 2011 to house delinquent mortgages.

Net interest margin, the difference between what a bank charges for loans and pays for deposits, was unchanged in the fourth quarter from three months earlier at 2.23%, and up from 2.14% a year earlier.

Investment-banking revenue, which includes dealmaking and underwriting securities in the business run by Christian Meissner, slid 3.9% to $1.22 billion, the company said. That beat the $1.14 billion average estimate of seven analysts surveyed by Bloomberg. Last month, Moynihan said he expected those activities would generate $1 billion to $1.2 billion in the fourth quarter.

Consumer-banking profit rose 11% to $1.92 billion, while income from credit cards fell 1.8% to $1.29 billion from a year earlier.

Mortgage Revenue

Mortgage revenue almost doubled to $519 million from a year earlier, the bank said. Barclays Plc’s Jason Goldberg had expected the bank to generate $252 million from mortgage banking as fewer consumers take out residential loans, while Macquarie Group Ltd.’s David Konrad estimated $218 million.

The bank increased its share buyback authorization for the first half of 2017 to $4.3 billion from $2.5 billion.

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