Bank of America Corporation
) reported break-even earnings per share for the third quarter,
substantially better than the Zacks Consensus Estimate of a loss of
7 cents. However, this compares unfavorably with the earnings of 56
cents in the prior-year quarter.
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Results for the reported quarter were aided by a substantial
slowdown in provision for credit losses and almost stable
noninterest expense. The quarter witnessed improvement in credit
quality across most major portfolios. Also, strong mortgage banking
and investment banking performances were among the high points of
the quarter. On the flip side were lower net interest income and
As previously announced by the company, results for the quarter
were negatively impacted by certain special items - debit valuation
adjustments (DVA) and fair value option (FVO) of $1.9 billion,
litigation expense of $1.6 billion and a charge related to a
reduction in the U.K. corporate tax rate $0.8 billion. These three
items had a $0.28 per share negative impact on earnings. Otherwise,
Bank of America would have earned 28 cents per share during the
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.
Quarter in Detail
Fully taxable-equivalent revenue (net of interest expense) was
$20.7 billion, down 28% from $28.7 billion in the prior-year
quarter. Revenue also missed the Zacks Consensus Estimate of $21.6
Net interest income on a fully taxable-equivalent basis was $10.2
billion, down 5% from $10.7 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 remained flat compared with the year-ago quarter at
Noninterest income came in at $10.5 billion, down 42% from $18.0
billion in the prior-year quarter, primarily due to negative DVA
and FVO adjustments and lower equity investment income.
Non-interest expense was $17.5 billion, almost flat compared with
$17.6 billion in the year-ago quarter. An increase in other general
operating expense related to Merrill Lynch class action settlement
was offset by a decrease in personnel expense.
Book value per share as of September 30, 2012 was $20.40, compared
with $20.16 as of June 30, 2012 and $20.80 as of September 30,
2011. Tangible book value per share as of September 30, 2012 was
$13.48, compared with $13.22 at the end of the prior quarter as
well as the prior-year quarter.
With the gradual recovery of the economy, 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 48% year over year to $1.8 billion.
As of September 30, 2012, nonperforming loans, leases and
foreclosed properties ratio was 2.77%, down 38 basis points (bps)
from the prior-year period. Net charge-off ratio decreased 31 bps
year over year to 1.86%.
At the end of the reported quarter, the company's Tier 1 common
capital ratio (Basel 1) was 11.41% compared with 11.24% at the end
of the prior quarter and 8.65% at the end of the prior-year
quarter. Tangible common equity ratio was 6.95% compared with 6.83%
at the end of the prior quarter and 6.25% at the end of the
prior-year quarter. As of September 30, 2012, the Tier 1 common
capital ratio under Basel 3 was estimated at 8.97%, up from 7.95%
as of June 30, 2012.
BofA's competitors --
JPMorgan Chase & Co.
Wells Fargo & Company
) -- upheld the banking image with strong third quarter results
primarily on the back of improvement in capital market activity and
healthy mortgage business. For JPMorgan, results primarily
benefited from improved revenue, while Wells Fargo primarily
benefited from lower expenses.
The Goldman Sachs Group Inc.
) also reported better-than-expected third quarter earnings. While
Goldman's results were aided primarily by a substantial growth in
revenue, Citigroup benefited from reduction in loan loss
Through the sale of its non-core assets, BofA has been striving
hard to improve its capital levels. This effort has resulted in
success with respect to clearing the most difficult stress test
(fourth round) conducted by the Fed.
Nevertheless, we believe that various revenue headwinds, elevated
operating expenses and issues related to regulatory changes will
continue to impact near-term results.
Overall, the company is making every effort to keep itself afloat.
Measures like realigning the balance sheet in accordance with
regulatory changes, launching expense reduction initiatives and
continuously improving asset quality vouch for better prospects.
BofA currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Also, we maintain a long-term 'Neutral'
recommendation on the shares.