Bank of America delivered a message on Monday, Sept. 14, that worried investors.
Chief Executive Brian Moynihan told a financial conference that the bank’s Wall Street businesses are slowing after a strong first half of the year. The comments quickly changed how some investors viewed the bank.
Shares closed sharply lower, and the drop pulled other big bank stocks down with them. For anyone holding Bank of America or a broad financial fund, the question now is simple. Was this a short pause, or the start of a slower stretch for the whole sector?
Why Bank of America stock fell after Moynihan’s warning
Moynihan spoke at the Barclays Global Financial Services Conference on Sept. 14 and said Bank of America expects third-quarter investment banking fees of $1.6 billion to $1.8 billion, down from $2 billion a year earlier.
Investment banking fees are the money a bank collects for advising companies on mergers and for helping them raise cash by selling new stock or bonds. Analysts had expected about $2 billion, so the guidance came in clearly below target, Investing.com reported.
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Investors reacted immediately. Bank of America stock closed down about 5% at $59.47, and the S&P 500 banking index dropped 2.7% on the day, Reuters confirmed. The warning from Moynihan, who has run Bank of America since 2010, mattered more to investors because he rarely surprises investors on the downside.
“What we’re seeing is the market generally in investment banking is down 10% or so,” he said, adding that his bank could fall a bit more because it holds a smaller share of the busiest deal areas.
“We’re down to [a] small position in some of the businesses that had more activity, so we’ll be down probably a bit more than that,” Moynihan noted.
How Bank of America makes money and why Q2 raised expectations
Bank of America manages money for individuals and institutions. It also runs a Wall Street arm that advises on deals and trades stocks and bonds for clients.
The second quarter raised expectations. Bank of America reported a 50% increase in investment banking fees and a 33% rise in sales and trading revenue, Benzinga reported. Dealmaking activity remained strong through July and August, so many investors assumed the momentum would continue.
However, the third quarter looks different. The wider dealmaking market is running about 10% lower, based on Dealogic figures cited by CNBC, and Bank of America expects a steeper drop of its own.
At the low end of its guidance, $1.6 billion would mean a decline of roughly 20% from last year, worse than the mild drop some investors had hoped for.
What Bank of America’s warning signals for bank stocks and interest rates
Moynihan described the slowdown as a market-wide shift that affects other banks as well.
Later that day, Citigroup Chief Financial Officer Gonzalo Luchetti told analysts that its investment banking revenue is tracking toward low-single-digit growth and trading toward mid-single-digit growth. “September is a key month,” Luchetti said, a reminder that the quarter is not over.
Moynihan said the deal pipeline remains full, but he warned that higher rates could slow the financing demand that drives those fees. “Right now we’re seeing it solid, and the pipelines are staying full,” he said. With the Federal Reserve expected to raise rates this week, borrowing costs may stay high, keeping some deals on hold.
For investors, the clearer test arrives in mid-October, when the bank reports third-quarter results and shows whether dealmaking recovered or kept slowing.
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