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Interest rates seem to be the emerging story of this quarter’s bank earnings. Q2 was all about trading income and loan loss provisions; Q3 is all about the collapse in net interest income.

It should come as no surprise that US banks are struggling with ultra-low rates, but there has been a significant drop in the core earning capacity of banks this quarter that cannot be masked by strong trading revenues.

Bank of America beat on the bottom line but missed on the top. Net income came in at $4.9 billion, or $0.51 per diluted share, which was a little ahead of the $0.49 expected and down 16% on the year. Provision for credit losses increased to $1.4 billion, driven by COVID-19 impacts in commercial lending.

BoA is very sensitive to rates and shares in pre-market trading did not take well to the decline in rates income, with BAC -1.6% after its 2.84% decline yesterday. Net interest income (NII) was down $2.1bn, or 17%, to $10.1 billion, driven by lower interest rates.

This comes after JPM reported –9% yesterday and it is a material increase in the pace of the decline from the –11% posted in Q2. This sensitivity is explained by the fact that loans were up 5% to $319 billion; while JPM saw lending decrease, which would lower its exposure to interest rates. In the consumer bank, net income declined $1.3 billion to $2.1 billion, while revenues of $8.0 billion were -17% lower, driven by lower NII from lower rates.

Noninterest income was also lower, declining by 4% to $10.2bn, reflecting a drop in fee income which was offset by better trading and investment banking results. That said, trading revenues weren’t spectacular – FICC +3% and equities +6%, which was not as strong as peers.

Return on equity improved. In Q2 return on equity (ROE) fell to 5.44% from 5.91% in the prior quarter and was down significantly from last year’s Q2 11.62%. Return on tangible equity (ROTE) slipped to 7.63% from 8.32% in Q1 2020 and from 16.24% in Q2 2019. In Q3, ROE rose to 7.24%, while ROTE rose to 10.16%.

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