The trend of industry frontrunners beating or meeting earnings
estimates has been maintained by
Bank of America Corporation
) which delivered a positive earnings surprise of 41.4% for the
second quarter. Also, the company reached a $650 million settlement
with AIG to resolve its residential mortgage-backed securities
(RMBS) litigation. The company came out with adjusted earnings per
share of 41 cents, beating the Zacks Consensus Estimate 29 cents.
The number is also significantly higher than 32 cents earned in the
Results exclude 22 cents a share (after tax) in litigation
expenses. Considering this one-time item, the company has earned 19
cents per share.
Lower provision for credit losses and higher-than-expected top
line were the primary drivers of this impressive performance,
before considering litigation expenses. Controlled expense line
also supported the results. However, both top and bottom lines
showed a year-over-year decline.
Shares of BofA were down over 2% in the morning trade, indicating
that investors are disappointed with such huge litigation costs.
The price reaction during the full trading session will give a
better idea about whether investors consider the underlying
strength in the company.
The quarter witnessed improved credit quality and higher brokerage
assets. However, lower mortgage banking income and equity
investment income were the downsides.
Investment banking performance remained decent. BofA Merrill Lynch
was ranked #2 in global net investment banking with fees of $1.6
billion. While Consumer and Business Banking showed solid income
growth over the year-ago quarter, losses in Consumer Real Estate
Services increased significantly. Global Banking and Global Markets
showed year-over-year improvement in net income during the quarter.
The company's balance sheet position remained stable and showed
improvement in capital ratios. Reduced long-term debt due to
maturities and efficient liability management were also among the
Quarter in Detail
Fully taxable-equivalent revenues (net of interest expense) were
$22.0 billion, down 4% from $22.9 billion in the prior-year
quarter. However, this was above the Zacks Consensus Estimate of
Net interest income on a fully taxable-equivalent basis was $10.2
billion, down 5% from $10.8 billion in the year-ago quarter.
Reduced yields on debt securities were primarily responsible for
this decline. Net interest yield deteriorated 13 basis points (bps)
year over year to 2.22%.
Noninterest income declined 4% year over year to $11.7 billion.
Lower mortgage banking and equity investment income were primarily
responsible for the downfall.
Noninterest expense was $18.5 billion, 16% higher year over year.
Higher mortgage-related litigation expense was partially offset by
lesser personnel expense. However, the company's aggressive cost
containment measures were evident in the expense line as
noninterest expense, excluding litigation expense, declined 6% year
over year to $14.6 billion.
Book value per share as of Jun 30, 2014 was $20.16 compared with
$20.75 as of Mar 31, 2014 and $20.18 as of Jun 30, 2013. Tangible
book value per share as of Jun 30, 2014 was $14.24 compared with
$13.81 at the end of the prior quarter and $13.32 at the end of the
Credit quality continued to improve during the quarter with net
charge-offs declining across all major portfolios. Provision for
credit losses decreased 66% year over year to $411 million.
As of Jun 30, 2014, nonperforming loans, leases and foreclosed
properties ratio was 1.70%, down 63 bps year over year. Quarter-end
net charge-off ratio decreased 14 bps sequentially and 46 bps year
over year to 0.48%.
At the end of the reported quarter, the company's common equity
tier 1 capital ratio (Basel 3 Transition) was 12.0% compared with
11.8% at the end of the prior quarter. Tangible common equity ratio
was 7.14% compared with 7.00% at the end of the prior quarter and
6.98% at the end of the prior-year quarter.
The company's loss in the first quarter put a pause to its recovery
story. Further, the detection of an accounting error earlier this
quarter led it to revise capital ratios downward that added to the
worries. However, the latest results and the settlement with AIG
indicate its return to the right track based on underlying
strength. In addition to realigning its balance sheet in accordance
with regulatory changes, the company has been focusing on cost
We expect litigation and various regulatory issues to stain its
results in the upcoming quarters as well. But the measures taken by
the company should help it to evade the challenges to a great
Among other banking giants,
Wells Fargo & Company
JPMorgan Chase & Co.
) have come out with second-quarter results so far. Though the
industry backdrop was tough during the quarter and seasonal
softness was blatant, all these big banks managed to report decent
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