Bank of America Corporation’s (BAC) first quarter 2010 earnings came in at 28 cents per share, substantially ahead of the Zacks Consensus Estimate of 9 cents. However, this compares unfavorably with the earnings of 44 cents in the prior-year quarter.
Strong capital markets activity and lower provision for credit losses were the primary factors that helped BAC to bounce back to profitability after incurring significant losses for the last couple of quarters.
Since the end of 2009, BofA has been absolutely free from pay restrictions as it has repaid the full TARP money.
Behind the Headlines
The better-than-expected results were driven by BofA’s industry-leading corporate and investment banking performances that helped drive results for Global Banking and Markets. However, credit costs remain high as a result of relatively weak global economic conditions and a sluggish recovery.
Sequential improvement in non-interest income has also helped BofA to become profitable during the reported quarter. Non-interest income increased 35% sequentially as a result of record sales and trading revenue.
Net interest income was also on the upside, which improved on a sequential as well as year-over-year basis as a result of the adoption of new consolidation accounting guidance effective Jan 1, which moved approximately $100 billion of net assets against the balance sheet.
Fully taxable-equivalent revenue net of interest expense was $32.3 billion, down 11% from $36.1 billion in the prior-year quarter, reflecting the absence of year-earlier credit-related gains on Merrill Lynch structured notes, the sale of an equity investment and lower mortgage banking volume and income.
Net interest income on a fully taxable-equivalent basis was $14.1 billion, up 10% from $12.8 billion in the year-ago quarter.
Net interest yield increased 23 basis points (bps) year-over-year to 2.93%. However, average loans declined 2% year-over-year, reflecting economic conditions and lower demand.
Non-interest income came in at $18.2 billion, down 22% from $23.3 billion in the prior-year quarter. The decline was driven by lower mortgage banking income and decreases in both card income and equity investment income.
Non-interest expense increased to $17.8 billion from $17.0 billion in the prior-year quarter. The increase in non-interest income reflects higher personnel and general operating expenses. Pretax merger and restructuring charges declined to $521 million from $765 million in the year-ago quarter.
The efficiency ratio on a fully taxable-equivalent basis was 55.05% compared to 47.12% in the prior-year quarter. Book value per share of common stock as of Mar 31, 2010 was $21.12, compared to $21.48 as of Dec 31, 2009 and $25.98 as of Mar 31, 2009.
Evaluation of Credit Quality
Though credit costs have declined across most loan portfolios, overall credit costs remain high. However, credit quality was mixed during the quarter. Provision for credit losses decreased sequentially as well as year-over-year to $9.8 billion.
Nonperforming loans, leases and foreclosed properties increased 1% sequentially and 40% year-over-year to $35.9 billion. Net charge-offs increased 28% sequentially and 56% year-over-year to $10.8 billion. Net charge-off ratio deteriorated 73 bps sequentially to 4.44% but nonperforming loans ratio improved 29 bps sequentially to 3.69%.
Capital Ratios
At the end of the reported quarter, the company’s Tier 1 capital ratio deteriorated to 10.23% from 10.40% at the end of prior quarter. Tier 1 common ratio deteriorated to 7.60% from 7.81% at the end of the prior quarter.
The market turmoil was more harmful to BofA than any of its peers, other than Citigroup (C). However, BofA has concluded its biggest acquisitions. The company acquired Merrill Lynch near the height of the financial crisis last year. It also acquired Countrywide Financial Corporation in July 2008.
The CEO views these deals as beneficial for stakeholders of the company. Furthermore, this will allow the bank to focus on rebuilding customer relationships.
In Mar 2010, BofA said that it would forgo about $3 billion in principal loan amounts for about 45,000 troubled borrowers. BofA is expected to start the process in May 2010. Following the execution, BofA will be the first U.S. mortgage lender to take such a systematic approach to reduce mortgage principal to help distressed borrowers by preventing foreclosures.
Most of the major banks are still suffering from losses related to mortgages and credit cards of their retail banking operations. However, earlier this week, JPMorgan Chase (JPM) — the first of the major banks to report — posted strong first quarter results with solid investment banking performance and lower loan losses.
JPMorgan’s first quarter earnings came in at 74 cents per share, substantially ahead of the Zacks Consensus Estimate of 63 cents. Obviously, the results of JPMorgan and BofA have raised the bar for other major U.S. banks.
Following JPMorgan and BofA, the other major banks that are scheduled to report next week are Citigroup on April 19, Goldman Sachs (GS) on April 20, Morgan Stanley (MS) on April 21 and Wells Fargo (WFC) on April 21.
Since the announcement of results, the share price of BofA has decreased 0.5% in pre-market trading.
Read the full analyst report on “BAC”
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Read the full analyst report on “JPM”
Read the full analyst report on “GS”
Read the full analyst report on “MS”
Read the full analyst report on “WFC”
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