Bank of America Corporation
(
BAC
) reported fourth-quarter 2012 earnings of 3 cents per share,
which managed to beat the Zacks Consensus Estimate by a cent.
However, this compares unfavorably with the earnings of 15 cents
in the prior-year quarter. This represents the fourth straight
quarter with a positive earnings surprise for this mega bank.
Results for the reported quarter were aided by a substantial
slowdown in the provision for credit losses and a reduction in
non-interest expenses. A significant contraction in the top line
faded the shine of its bottom line to a great extent.
The quarter witnessed an improvement in credit quality across
major portfolios and a compelling trading performance, thanks to
better capital market activities during the quarter. Also, strong
mortgage banking and investment banking performances as well as
improved commercial lending were among the drivers. On the flip
side were an increase in consumer real estate losses related to
the Fannie Mae settlements and the provision for the IFR
acceleration agreement.
As previously announced by the company, results for the quarter
were negatively impacted by certain special items - provision of
$2.7 billion for the settlements with Fannie Mae, other provision
of $2.5 billion for items including the IFR agreement, debit
valuation adjustments (DVA) and fair value option (FVO) of $0.7
billion.
However, a net income tax benefit of $1.3 billion, a gain of
$0.4 billion related to its stake in Mitsubishi UFJ Merrill Lynch
PB Securities and a valuation adjustment of $0.3 billion on
mortgage servicing rights (MSR) were the offsetting factors.
These items had an 18-cent per share negative impact on earnings.
Otherwise, Bank of America would have earned 21 cents per share
during the quarter.
The company made significant progress in strengthening its
balance sheet during the quarter, reflected by improved capital
ratios. Strong time-to-required funding and reduced long-term
debt were also among the positives.
For full-year 2012, earnings were 25 cents per share compared
with just a cent in the previous year. The results also surpassed
the Zacks Consensus Estimate by a penny.
Quarter in Detail
Fully taxable-equivalent revenues (net of interest expense) were
$18.9 billion, down 25% from $25.1 billion in the prior-year
quarter. Revenues also missed the Zacks Consensus Estimate of
$21.3 billion.
For the full year, revenues (net of interest expense) came in at
$84.2 billion, missing the Zacks Consensus Estimate of $87.5
billion and the year-ago revenues of $94.4 billion.
Net interest income on a fully taxable-equivalent basis was $10.5
billion, down 4% from $11.0 billion in the year-ago quarter.
Reductions in consumer loan balances were largely responsible for
the downfall, which was partially offset by a reduction in
long-term debt balance and lower rates paid on deposits. Net
interest yield deteriorated to 2.35% from 2.48% in the year-ago
quarter.
Noninterest income came in at $8.3 billion, down 41% from $14.2
billion in the prior-year quarter, primarily due to mortgage
banking losses as a result of the Fannie Mae settlement.
Non-interest expense was $18.4 billion, down 3% from $18.9
billion in the year-ago quarter. A decrease in personnel expense
due to its cost saving initiatives primarily reduced the
non-interest expense.
Book value per share as of Dec 31, 2012 was $20.24 compared with
$20.40 as of Sep 30, 2012 and $20.09 as of Dec 31, 2011. Tangible
book value per share as of Dec 31, 2012 was $13.36 compared with
$13.48 at the end of the prior quarter and $12.95 at the end of
the year-ago quarter.
Credit Quality
With speedier economic recovery, credit quality continued to
improve during the quarter with net charge-offs declining across
almost all major portfolios from the prior-year quarter.
Provision for credit losses decreased 25% year over year to $2.2
billion.
As of Dec 31, 2012, nonperforming loans, leases and foreclosed
properties ratio was 2.62%, down 39 basis points (bps) from the
prior-year period. Net charge-off ratio decreased 34 bps year
over year to 1.40%.
Capital Ratios
At the end of the reported quarter, the company's Tier 1 common
capital ratio (Basel 1) was 11.06% compared with 11.41% at the
end of the prior quarter and 9.86% at the end of the prior-year
quarter. Tangible common equity ratio was 6.74% compared with
6.95% at the end of the prior quarter and 6.64% at the end of the
prior-year quarter. As of Dec 31, 2012, the Tier 1 common capital
ratio under Basel 3 was estimated at 9.25%, up from 8.97% as of
Sep 30, 2012.
Competitive Landscape
Among BofA's competitors,
JPMorgan Chase & Co.
(
JPM
),
Wells Fargo & Company
(
WFC
) and
The Goldman Sachs Group Inc.
(
GS
) have already reported better-than-expected fourth quarter
results and upheld the banking image. Banks have been primarily
reporting strong results on the back of improved capital market
activity and healthy mortgage business. Results for JPMorgan,
Wells Fargos and Goldman were primarily aided by improved top
line.
Among the other Wall Street majors,
Citigroup Inc.
(
C
) has released its earnings today and
Morgan Stanley
(
MS
) will report on Jan 18.
Our Viewpoint
BofA has been making significant progress in strengthening its
balance sheet as reflected by improved capital ratios.
Nevertheless, we expect continuous litigations and various
regulatory issues to impact its results in the near to medium
term.
Overall, the company is making every effort to keep itself
afloat. In addition to realigning its balance sheet in accordance
with regulatory changes, the company has taken measures like cost
containment and asset quality improvement.
BofA currently retains a Zacks Rank #3 (Hold). Also, we maintain
a long-term Neutral recommendation on the shares.
BANK OF AMER CP (BAC): Free Stock Analysis
Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis
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JPMORGAN CHASE (JPM): Free Stock Analysis
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MORGAN STANLEY (MS): Free Stock Analysis
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WELLS FARGO-NEW (WFC): Free Stock Analysis
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