Bank of America Corp (BAC) Generates Substantial Profits

The financial sector came through with a fairly phenomenal quarter. Banks in general have been able to lower operating costs, losses related to lending, and have been able to generate added fees from non-lending services. It’s also nice to know that this bank, in particular, has been able to increase the amount of lending income.

Earnings highlights

Bank of America Corp (NYSE:BAC) had a great quarter. The company was able to increase the amount of earnings from lending related activities, which were up from $9.5 billion to $10.5 billion year-over-year. It also grew its total revenue from $21.9 billion to $22.7 billion. This was because interest income was up while income from non-interest based activities was down.

The company reported a 31% year-over-year reduction in credit related losses and followed that by reducing non-interest expenses by $1 billion. It also reported diluted earnings per share of $0.32 per share while the analyst consensus was $0.25, so the company beat its estimated earnings figure by a significant margin. It was able to grow second quarter earnings by 88% year-over-year.

Bank of America Corp (NYSE:BAC) also grew the size of its lending portfolio by $29.3 billion and deposits were up by $45.6 billion. It was able to grow its lending revenue, despite a cut on operating costs, which some feared would negatively impact top-line growth. However, this wasn’t the case and the stock popped.

Industry headwinds

Source: YCharts

Bank of America Corp (NYSE:BAC) has been able to experience the greatest gains in profitability, whereas Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM) have maintained quarterly net profit margins around 25%. The banking sector in general has benefited from falling loan related losses and declining litigation related expenses.

JPMorgan Chase & Co. (NYSE:JPM) was recently squeezed by regulators for the manipulation of the energy markets. Further back, Bank of America Corp (NYSE:BAC) got caught up with a foreclosure scandal (it tried to prevent homeowners from applying for the Home Affordable Modification Program).

The CEOs of these large banking entities generally don’t endorse this type of behavior, but because these organizations are so huge, some of the decisions made by the employees result in litigation charges that the banks now have to deal with.

Fortunately, these types of litigation charges are expected to slow for the banking sector and will bring banks closer to profitability. If it so desired, Bank of America Corp (NYSE:BAC) could return value to shareholders if it were to reduce headcount while increasing the amount of lending.