Bank of America (BAC.US) once plunged 6% as CEO sends cautious signal: Q3 trading revenue expected to be flat year-over-year, investment banking fee income may fall short of expectations

According to Investing.com, Bank of America (BAC.US) CEO Brian Moynihan stated that the bank's trading business revenue for the third quarter is expected to be "basically flat" compared to the same period last year, implying that after robust growth in the first half of the year, the momentum in Wall Street's trading business is slowing down. Meanwhile, the bank's investment banking revenue forecast also fell short of market expectations. After the announcement, Bank of America's share price plunged as much as 6% intraday on Monday, marking its largest intraday drop since April last year. By the close, the stock fell by 5.14% to $59.47.

On Monday at a conference held by Barclays, Moynihan said fee revenues from Bank of America's investment banking business in the third quarter are projected to be around $1.6 billion to $1.8 billion, while analysts had expected nearly $2 billion. The weaker investment banking outlook has further exacerbated investor concerns about the bank's capital markets performance. Shares of other major Wall Street banks also came under pressure, with Goldman Sachs (GS.US) falling about 3.96% and Morgan Stanley (MS.US) down 3.64%.

Trading Business Cools Down, Strong Momentum From H1 Hard to Sustain

Moynihan said in an interview that so far in the third quarter, Bank of America's equities trading business has seen revenue growth, but fixed income trading has declined and been more volatile. As a result, the two are expected to offset each other, leaving overall quarterly trading income roughly flat year-on-year.

Analysts at Keefe, Bruyette & Woods noted that the decline in financing activities is partly due to lower balances in international and Asian prime brokerage businesses.

This performance stands in stark contrast to the first half of the year. In early 2024, Wall Street trading started strong, with Bank of America's equities traders posting a record high quarterly income in Q2. However, entering the third quarter, financial markets have continued to be turbulent, with a widespread sell-off of AI concept stocks in July, which led to significant volatility for Leopold Aschenbrenner’s hedge fund Situational Awareness. Recently, some AI industry executives have called for slowing the pace of AI development, prompting a new wave of sell-offs in chip stocks.

Despite the slowdown in trading revenue growth in the short term, Moynihan still believes that the full year of 2026 could be a strong year for Bank of America's markets business. The bank's sales and trading division is currently aiming for its 17th consecutive quarter of revenue growth. When asked whether this record can continue, Moynihan joked: "We are competing fiercely for that."

Interest Rate Volatility Suppresses Bond Financing, Fed Decision Is Key

Moynihan sees uncertainty in the interest rate environment as a major factor currently affecting capital markets activity. The Federal Reserve will hold a monetary policy meeting later this week, and the upcoming rate decision is expected to bring some stability to the market.

He stated, "Rates will ultimately stabilize, and I think that will help some trading activity." However, for debt financing, which accounts for a large part of market activity, the key issue is that the interest rate structure cannot remain highly volatile. Only when companies have greater certainty about future funding costs are they more willing to issue bonds.

In other words, the current level of interest rates is not the only concern; sharp fluctuations in rates are also dampening corporate financing appetites. If the Fed's policy path becomes clearer, bond issuance and related capital markets activity could find some support.

Investment Banking Misses Expectations, Capital Markets Competitiveness in Focus Again

In M&A and deal advisory, Moynihan acknowledged that Bank of America currently does not have a strong presence in some of the industries where M&A activity is most active, which is one reason for the business's underperformance. However, he emphasized that the bank's pipeline of deals remains robust, and the key now is to push these transactions to completion.

Wells Fargo analyst Mike Mayo noted that Moynihan attributed investment banking results more to the business mix rather than execution capability, further fueling market discussions that "Bank of America's capital markets business is lagging behind its peers."

As a result, the third quarter's expected investment banking fees of only $1.6 billion to $1.8 billion, instead of the approximately $2 billion previously forecasted by analysts, became one of the main reasons for Bank of America's sharp share price drop on Monday.

Net Interest Income Remains a Bright Spot, Full-Year Growth Likely at High End of Guidance

In contrast to the relatively soft capital markets business, Moynihan remains optimistic about Bank of America's core banking operations. He said on Monday that he is "very satisfied" with the company's net interest income guidance.

Bank of America previously projected net interest income growth for 2026 to be at the upper end of the 6% to 8% range. Net interest income reflects the income banks earn from interest-paying assets minus their interest expenses, and is an important indicator of profitability for traditional banking operations.