Bank of America Corporation’s (BAC) first quarter 2011 earnings came in at 17 cents per share, way below the Zacks Consensus Estimate of 27 cents. This also compares unfavorably with earnings of 28 cents in the prior-year quarter.
Lower credit costs, gains from equity investments, and higher asset management and investment banking fees were among the positives. Even U.S. credit card continued to show improvements. However, these positives were primarily marred by a lower top line and higher non-interest expense. Reduced mortgage banking income and higher litigation expenses were also among the negatives.
Quarter in Detail
Fully taxable-equivalent revenues net of interest expense were $27.1 billion, down 16% from $32.3 billion in the prior-year quarter. It also missed the Zacks Consensus Estimate of $27.2 billion.
Net interest income on a fully taxable-equivalent basis was $12.4 billion, down 12% from $14.1 billion in the year-ago quarter. Net interest yield decreased 26 basis points (bps) year over year to 2.67%.
Non-interest income came in at $14.7 billion, down 19% from $18.2 billion in the prior-year quarter. The decline was due to lower trading account profits, a drop in mortgage banking income and a decrease in service charge income.
Non-interest expense was $20.3 billion, up 14% from $17.8 billion in the prior-year quarter. Thisincludes $874 million of mortgage-related assessments and waivers.The growth in non-interest expense reflects increases in personnel as well as litigation costs.
The efficiency ratio on a fully taxable-equivalent basis was 74.86% compared with 55.05% in the prior-year quarter.
Book value per share as of March 31, 2011 was $21.15, compared to $20.99 as of December 31, 2010 and $21.12 as of March 31, 2010.
Credit Quality
Overall credit costs continued to decline due to improving economic conditions. Also, creditquality showed an improvement during the quarter. Provision for credit losses decreased 26% sequentially and 61% year over year to $3.8 billion. The provision was lower than net charge-offs, resulting in a $2.2 billion reduction in the allowance for loan and lease losses.
Nonperforming loans, leases and foreclosed properties decreased 8 bps sequentially and 29 bps year over year to 3.40% of total loans, leases and foreclosed properties. Net charge-off ratio improved 26 bps sequentially and 183 bps year over year to 2.61%.
Capital Ratios
At the end of the reported quarter, the company’s Tier 1 capital ratio improved to 11.32% from 11.24% at the end of prior quarter and 10.23% at the end of prior-year quarter. Tier 1 common ratio also improved to 8.64% from 8.60% at the end of the prior quarter and 7.60% at the end of prior-year quarter.
Competitive Landscape
BofA’s competitor — JPMorgan Chase & Co. (JPM) upheld the banking banner with impressive results on Wednesday.
JPMorgan’sfirst quarter earnings came in substantially ahead of the Zacks Consensus Estimate. The surprising numbers were primarily supported by a substantial slowdown in the provision for credit losses and lower non-interest expense, which more than compensated decreases in interest and non-interest revenues.
All the other segments except Retail Financial Services performed well during the quarter. However, as expected, investment banking results witnessed a slight decline from the prior-year quarter owing to higher non-interest expense and slightly lower revenue.
Close on the heels of JPMorgan and BofA, among other major banks, Citigroup Inc. (C) is scheduled to report on April 18, Goldman Sachs Group Inc. (GS) on April 19, Wells Fargo & Company (WFC) on April 20 and Morgan Stanley (MS) on April 21.
Our Viewpoint
We are primarily concerned about BofA’s elevated cost structure. Non-interest expense increased significantly during the last three consecutive quarters. As the company is in the process of addressing legacy issues and continues to invest in its franchise, expenses are expected to remain high throughout 2011.
Most importantly, BofA’s plan to boost its dividend in the second half of 2011 was rejected by the Federal Reserve. This came as a rude shock to the company, particularly after many big banks got the much-awaited green signal from the Fed to hike dividends, following the release of second round stress test results in March.
BofA needs to show the Fed even more financial strength, in case it needs to battle another downturn. Though the Fed has given the company a second chance, allowing it to submit a revised capital plan, the rejection of the dividend plan will surely stain investor confidence.
However, the company is poised to benefit from its large scale operations and improving credit quality.
The shares of BofA maintain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. However, considering the company’s fundamental weakness, we have a long-term “Underperform” recommendation on the stock.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
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