Bank of America Corporation (BAC) reported fourth quarter earnings of 15 cents per share, substantially lower thanthe Zacks Consensus Estimate of 23 cents. However, this compares favorably with the loss of 16 cents in the prior-year quarter. The sale of non-core assets and accounting gains made it possible for the company to remain profitable.
Results for the quarter benefited from significant pre-tax gains from certain non-recurring items including the sale of a stake in China Construction Bank shares ($2.9 billion), the exchange of trust preferred securities ($1.2 billion)and the sales of debt securities($1.2 billion). Also, there were certain negative one-time items including mortgage-related litigation expense ($1.5 billion), fair value adjustment on structured liabilities ($0.8 billion) and goodwill impairment charge ($0.6 billion).
Excluding these nonrecurring items, the company would have incurred a loss of about 1 cent per share compared with earnings of 4 cents in the year-ago quarter.
A significant reduction in the size of balance sheet, enhanced Tier 1 common equity ratio, increased time-to-required funding as well as growth in commercial and industrial loan balances were among the positives during the quarter. Moreover, the core results were aided by an improved non-interest income and lower provision for credit losses. On the flip side was a higher non-interest expense. Also, capital and liquidity still remained weak.
For the full year 2011, the company reported earnings of 1 cent per share, a nickel lower than the Zacks Consensus Estimate. However, this compares favorably with the loss of 37 cents in the previous year.
Quarter in Detail
Fully taxable-equivalent revenue (net of interest expense) was $25.1 billion, up 11% from $22.7 billion in the prior-year quarter. Revenues also surpassed the Zacks Consensus Estimate of $24.0 billion.
Fully taxable-equivalent revenue for the full year was $94.4 billion, down 15% from $111.4 billion in the previous year. The Zacks Consensus Estimate for the full year was $93.3 billion.
Net interest income on a fully taxable-equivalent basis was $11.0 billion, down 14% from $12.7 billion in the year-ago quarter. Net interest yield decreased 24 basis points (bps) year over year to 2.45%. Lower investment security yields along with reductions in consumer loan balances were largely responsible for the downfall.
Non-interest income came in at $14.2 billion, up 42% from $10.0 billion in the prior-year quarter, thanks to higher mortgage banking income, equity investment income and other income. Lower trading account profits and card income, however, restricted the non-interest income to an extent.
Excluding the goodwill impairment charge, non-interest expense was $18.9 billion, relatively flat compared with the year-ago quarter.
Book value per share as of December 31, 2011 was $20.09, compared with $20.80 as of September 30, 2011 and $20.99 as of December 31, 2010. Tangible book value per share as of December 31, 2011 was $12.95, compared with $13.22 as of September 30, 2011 and $12.98 as of December 31, 2010.
Credit Quality
Overall credit costs continued to decline with the gradual recovery of the economy. Also, credit quality showed an improvement during the quarter with net charge-offs declining across all major portfolios from the prior-year quarter.
Provision for credit losses decreased 43% year over year to $2.9 billion. The provision included reserve reductions of $1.1 billion driven primarily by improvements in projected delinquencies, collections and bankruptcies across the Card Services portfolios.
As of December 31, 2011, nonperforming loans, leases and foreclosed properties ratio was 3.01%, down 47 bps from the prior-year period. Net charge-off ratio decreased 113 bps year over year to 1.74%.
Capital Ratios
At the end of the reported quarter, the company’s Tier 1 common equity ratiowas 9.86% compared with 8.65% at the end of prior quarter and 8.60% at the end of prior-year quarter. Tangible common equity ratiowas 6.64% compared with 6.25% at the end of the prior quarter and 5.99% at the end of prior-year quarter.
Competitive Landscape
BofA’s competitor — JPMorgan Chase & Co. (JPM) — failed to impress like it usually does. The company’s fourth quarter earnings marginally missed the Zacks Consensus Estimate. Results for the reported quarter were primarily hurt by a substantial decrease in revenue, which more than offset a slowdown in provision for credit losses and lower non-interest expense.
For the last couple of quarters, JPMorgan has not been delivering exceptionally as it is wont to given the economic weakness at large and the fundamental pressures on the banking sector.
Citigroup Inc.‘s (C) also reported disappointing fourth quarter results. The company substantially missed the Zacks Consensus Estimate as top-line headwind continued. Expenses also increased in the quarter. However, improvement in credit quality was impressive.
Our Viewpoint
Through the sale of its non-core assets, Bank of America has been striving hard to soar up its capital levels and pass the fourth round stress test to be conducted by the Federal Reserve. However, the company will have an even higher stumbling block to clear this time as it has significant exposure to the stressed European countries. Naturally, its chances of passing the test and gaining eligibility to enhance shareholders value are rather dim.
We are also concerned about BofA’s elevated cost structure. Non-interest expense flared up during the last few quarters. As the company is in the process of addressing legacy issues and continues to invest in its franchises, expenses are expected to remain high throughout 2011.
Nevertheless, the company is poised to benefit from its large-scale operations and faster-than-expected improvement in credit quality.
Additionally, BofA launched a company-wide efficiency initiative with a goal to improve earnings by lowering expenses, increasing revenue, strengthening risk control and making changes to allow better execution and customer service, while returning more value to shareholders. The company will retrench about 30,000 workers under the first phase of its ongoing cost-cutting initiative — Project New BAC.
Overall, the company is making every effort to keep itself afloat. Measures like realigning the balance sheet in accordance with regulatory changes and shedding non-core assets to strengthen its capital position vouch for its good business intention.
The shares of BofA retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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