Bank of America Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Bank of America is a diversified bank holding company operating through Consumer Banking, Global Wealth & Investment Management (GWIM), Global Banking, Global Markets and All Other. Figures below are in U.S. dollars; amounts are rounded.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue, net of interest expense | $22.7bn | $21.5bn | +6% |
| Net interest income | $12.4bn | $10.2bn | +22% |
| Provision for credit losses | $523m expense | $1.6bn benefit | Expense increased |
| Noninterest expense | $15.3bn | $15.0bn | +2% |
| Net income | $6.2bn | $9.2bn | -32% |
| Diluted EPS | $0.73 | $1.03 | -29% |
| Efficiency ratio | 67.32% | 70.09% | Improved |
Higher interest rates, loan growth and lower securities premium amortization lifted net interest income; FTE net interest yield rose 25 basis points to 1.86%. Noninterest income fell 9%, mainly reflecting a 47% decline in investment banking fees, partly offset by stronger market-making revenue. The prior-year quarter included an approximately $2.0bn tax benefit from revaluing U.K. deferred tax assets; Q2 2022 also had a lower effective tax rate than the roughly 26% rate management cited excluding ESG tax credits and discrete benefits. These items, along with the credit-loss provision swing, complicate year-over-year earnings comparisons.
For the first half, revenue was $45.9bn (+4%), net income $13.3bn (-23%) and diluted EPS $1.53 versus $1.90. First-half provision was $553m, compared with a $3.5bn provision benefit in the prior-year period.
Balance sheet, liquidity and capital
- At June 30, assets were $3.11tn, loans and leases $1.03tn, deposits $1.98tn and long-term debt $275.7bn. Since year-end 2021, loans increased about $51.6bn while deposits declined about $80.1bn, partly due to customer tax payments and seasonal outflows.
- First-half cash flows were negative across operating activities ($50.5bn), investing activities ($51.7bn) and financing activities ($43.8bn); cash and cash equivalents fell $150.2bn to $198.0bn. The filing attributes the balance-sheet decline primarily to lower cash and securities, partly offset by loan growth.
- Average global liquidity sources were $984bn; average consolidated HQLA was $614bn and average LCR was 118%. The Corporation and insured depository institutions complied with the NSFR requirement.
- Standardized CET1 ratio was 10.5%, versus 10.6% at year-end; Tier 1 capital ratio was 12.3% and total capital ratio 14.2%. The Corporation and Bank of America, N.A. met the applicable well-capitalized definitions.
- Book capital returns included $3.6bn of common share repurchases and $3.4bn of common dividends declared in the first half. The Board subsequently raised the quarterly common dividend to $0.22 per share, payable September 30, 2022.
Material changes and segment results
- Consumer Banking: Q2 revenue rose 12% to $9.1bn, while net income declined 5% to $2.9bn as higher revenue was outweighed by the provision swing and expense growth. Average deposits grew 10% year over year.
- GWIM: Q2 revenue rose 7% to $5.4bn and net income increased 16% to $1.2bn. Client balances fell 8% year over year to $3.4tn, primarily due to lower market valuations, partly offset by positive flows.
- Global Banking: Q2 revenue fell 2% to $5.0bn and net income fell 38% to $1.5bn, chiefly due to higher credit-loss provision, lower investment banking and other income, and higher expenses.
- Global Markets: Q2 revenue declined 5% to $4.5bn, but net income rose 12% to $1.0bn, aided by lower expenses and net DVA gains. Excluding net DVA, segment net income declined to $898m.
- All Other: Q2 reported a $318m net loss, versus $1.9bn net income a year earlier, substantially reflecting a smaller tax benefit after the prior-year U.K. tax adjustment.
Outlook, risks and unusual items
- No explicit consolidated earnings or revenue guidance is provided in the supplied filing text. Management expects the stress capital buffer to rise by about 90 basis points from 2.5%; the Federal Reserve was expected to finalize it by August 31, 2022, for effectiveness October 1, 2022 through September 30, 2023. Management noted that higher rates can benefit banking-book net interest income but reduce the fair value of available-for-sale securities and capital through AOCI; modeled rate sensitivity assumes no customer deposit-mix changes or management response.
- The credit-loss allowance was $13.4bn, down $409m from year-end, reflecting improving asset quality and reduced pandemic uncertainty, partly offset by loan growth, a weaker macroeconomic outlook and Russian exposure. The allowance outlook used scenarios including persistent inflation and higher interest rates; its weighted outlook assumed U.S. unemployment just above 5% in Q4 2023 and GDP growth of 0.8% year over year in that quarter. These are allowance-model assumptions, not company guidance.
- Direct net Russia exposure was $550m at June 30, including $468m of loans; Russian loans were downgraded and treated as reservable criticized exposure. The duration and broader effects of the Russia/Ukraine conflict and sanctions remain uncertain.
- Market, inflation, supply-chain, geopolitical and economic conditions could adversely affect credit quality, trading, funding costs and results. Other disclosed risks include litigation and regulatory actions, cyber and operational disruption, climate-related risks, and the LIBOR transition ahead of remaining U.S. dollar LIBOR settings ceasing or becoming non-representative after June 30, 2023.
- Litigation-related expense, excluding legal-service-provider expenses, was $498m in Q2 and $604m for the first half. The filing estimates possible losses of up to $1.0bn in excess of accrued liabilities, if any, for specified matters and representations-and-warranties exposures; actual outcomes could differ materially. Separately, on July 14, 2022, BANA agreed to OCC and CFPB orders related to unemployment prepaid debit cards, including penalties of $125m and $100m and required remediation.
- First-half AOCI declined $11.6bn, largely due to valuation changes in debt securities and derivatives. The filing reports $2.5bn after-tax of cash-flow-hedge losses expected to be reclassified into earnings over the next 12 months, primarily decreasing net interest income.
Most important facts for investors to verify
- Whether higher rates continue to expand net interest income after accounting for deposit repricing, customer deposit migration and funding costs.
- Whether credit-loss provisions and asset quality worsen under inflation, slower growth or geopolitical stress, and how the allowance assumptions change.
- How much of the $11.6bn first-half AOCI decline affects regulatory capital and whether securities valuation losses reverse or persist.
- Final SCB determination and resulting capital-distribution capacity, including any effect on repurchases and dividends.
- Outcomes and ultimate costs of the prepaid-card enforcement actions, other regulatory matters and litigation beyond recorded accruals.
- Progress in remediating remaining LIBOR-linked contracts before the June 2023 transition deadline.