Bank of America Shares Slide After $1.2 Billion Regulatory Penalty Dents Third-Quarter Profit

Bank of America on Wednesday posted a sharp profit decline for the third quarter after being hit with a massive $1.2 billion penalty by U.S. regulators. The steep regulatory fine, combined with trading operations that generated about $750 million less than expected, weighed heavily on the financial institution’s quarterly performance and disappointed Wall Street expectations.

The negative impact of the dual headwinds was swift, sending shares of the second-biggest U.S. bank by assets tumbling almost 5% in Wednesday trading.

For the third quarter, the bank’s net profit fell 17% to $6.93 billion, or 91 cents a share. Excluding the impact of the Treasury penalty, which sapped income by 17 cents per share, earnings per share would have come in at $1.08.

Companywide revenue rose 3.2% to $30.12 billion on a fully taxable equivalent (FTE) basis, but that top-line figure missed analysts’ expectations by about $570 million, largely driven by shortfalls in the bank’s capital markets and trading operations.

The trading disappointment was particularly notable because it came just weeks after CEO Brian Moynihan told analysts during a September presentation that trading revenue for the quarter would be roughly flat. Instead, the combined bond and stock trading results fell by 5%.

Fixed income trading revenue dropped 17% to $2.55 billion, hampered by persistent weakness in mortgages, municipals, and credit activity. That performance came in roughly $450 million below consensus estimates compiled by StreetAccount.

Equities trading revenue climbed 10% to $2.51 billion, but that gain also fell short of analysts’ expectations by nearly $300 million.

Meanwhile, investment banking revenue dropped 11% to $1.8 billion, a result that was roughly in line with expectations and aligned with Moynihan’s previous guidance given in September.

Providing a bright spot for the institution, net interest income—a key profitability driver watched closely by Bank of America investors—rose 7.9% to $16.6 billion, slightly edging out the $16.53 billion StreetAccount estimate.

‘Worst in Class’

The unexpected financial shortfalls and regulatory developments drew sharp criticism from financial analysts. In a research note published Wednesday, Wells Fargo analyst Mike Mayo characterized the firm’s capital markets results as "easily worst in class" for the quarter.

The Treasury department episode, in which U.S. regulators stated that the company failed to report billions of dollars in suspicious transactions, has sparked broader questions across the financial sector regarding whether Moynihan has a firm handle on compliance controls at the banking giant.

During the company’s earnings call with analysts on Wednesday, several participants remarked on the sharp decline in Bank of America shares and pressed Moynihan about earlier assurances that compliance and operational costs would be successfully contained.

"Clearly you’ve had a huge charge this morning," JPMorgan analyst Vivek Juneja said during the call. "It’s not that you can’t absorb a billion. But obviously it’s a reputational and confidence issue."

Other analysts questioned management regarding the pace of future share repurchases and pressed for details concerning the bank’s underperformance in trading. Management defended the firm’s bond trading results by pointing to broader macroeconomic factors, specifically citing the sharp rise in interest rates observed during the period.

"It just happens when rates go up 85 basis points in a quarter, that tends not to be good for" credit and mortgage trading businesses, Chief Financial Officer Alastair Borthwick explained to analysts.

‘The Right Course’

Later on Wednesday, during an interview with CNBC’s Leslie Picker, Moynihan did not commit to a specific timeline regarding the ultimate resolution of the ongoing regulatory issues.

"We got to do the work, and then the regulators look at it," Moynihan said during the interview. "So I don’t want to speculate about the precise timeline."

The CEO added that he remained "confident that we are on the right course to remediate everything."

Moynihan assumed the helm at Bank of America in 2010 and spent the early years of his tenure steering the institution through extensive remediation efforts and making amends for mortgage-related legal and regulatory abuses stemming from the aftermath of the 2008 financial crisis.

The Treasury fine, which was announced on Tuesday, added unexpected 11th-hour intrigue to what was already a busy and closely watched bank earnings week. Earlier in the week, major financial institutions including JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo posted mixed results, highlighted by JPMorgan missing both earnings per share and revenue estimates for the first time in years.