Bank of America Corporation (BAC) reported first quarter earnings of 3 cents per share, missing the Zacks Consensus Estimate by 10 cents. This also compares unfavorably with the earnings of 17 cents in the prior-year quarter.
However, excluding certain nonrecurring items, BofA earned 34 cents per share, substantially higher than the Zacks Consensus Estimate.
Results for the reported quarter were significantly impacted by negative valuation adjustments related to the narrowing of the company’s credit spreads. However, the sale of non-core assets 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 debt and trust-preferred repurchases ($1.2 billion), equity investment ($0.8 billion) and the sale of debt securities ($0.8 billion). Also, there were certain negative one-time items including fair value adjustment on structured liabilities ($3.3 billion), debit valuation adjustments (DVA) on trading liabilities ($1.5 billion), annual retirement-eligible compensation costs ($0.9 billion) and litigation expense ($0.8 billion). Adjusting these nonrecurring items, the company’s earnings came in at 34 cent per share.
The company made significant progress in strengthening its balance sheet during the quarter, reflected by narrowing of credit spreads. Record Tier 1 common equity ratio, increased time-to-required funding, global excess liquidity sources as well as growth in commercial loan balances were among the positives during the quarter.
Moreover, the core results were aided by reduced non-interest expense and a substantially lower provision for credit losses. On the flip side were lower interest and non-interest income.
Quarter in Detail
Fully taxable-equivalent revenue (net of interest expense) was $22.5 billion, down 17% from $27.1 billion in the prior-year quarter. However, revenue surpassed the Zacks Consensus Estimate of $22.4 billion.
Net interest income on a fully taxable-equivalent basis was $11.1 billion, down 11% from $12.4 billion in the year-ago quarter. Net interest yield decreased 16 basis points (bps) year over year to 2.51%. Reductions in consumer loan balances and yields were largely responsible for the downfall, which was partially offset by a reduction in long-term debt balance.
Non-interest income came in at $11.4 billion, down 22% from $14.7 billion in the prior-year quarter, due to negative valuation adjustments on structured liabilities and higher DVA losses.
Non-interest expense was $19.1 billion, down 6% from $20.3 billion in the year-ago quarter. The decrease was primarily driven by lower litigation expense and a reduction in mortgage-related assessments and waivers costs.
Book value per share as of March 31, 2012 was $19.83, compared with $20.09 as of December 31, 2011 and $21.15 as of March 31, 2011. Tangible book value per share as of March 31, 2012 was $12.87, compared with $12.95 as of December 31, 2011 and $13.21 as of March 31, 2011.
Credit Quality
With the gradual recovery of the economy, credit quality continued to improve during the quarter with net charge-offs declining across all major portfolios from the prior-year quarter. Provision for credit losses decreased 37% year over year to $2.4 billion.
As of March 31, 2012, nonperforming loans, leases and foreclosed properties ratio was 3.10%, down 30 bps from the prior-year period. Net charge-off ratio decreased 81 bps year over year to 1.80%.
Capital Ratios
At the end of the reported quarter, the company’s Tier 1 common equity ratiowas 10.78% compared with 9.86% at the end of the prior quarter and 8.64% at the end of the prior-year quarter. Tangible common equity ratio was 6.58% compared with 6.64% at the end of the prior quarter and 6.10% at the end of the prior-year quarter.
Competitive Landscape
BofA’s competitors —JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC)and The Goldman Sachs Group Inc. (GS)– upheld the banking banner with better-than-expected results. Marked recovery of the bond and equity market and consequent revenue growth primarily helped these banks report strong results.
Though these mega banks were not able to deliver impressive results in the last few quarters due to weakness in the wider economy and fundamental pressures on the sector, these banking giants overcame the shortcomings with help of gradually improving macroeconomic elements, such as rising consumer spending and better employment.
However, with mixed first quarter results, Citigroup Inc. (C) failed to impress investors. The results were primarily hurt by accounting charges. Due to the tightening of credit spreads, the company incurred a loss of $1.3 billion for credit valuation adjustment (CVA) and debt valuation adjustment (DVA).
Our Viewpoint
Through the sale of its non-core assets, Bank of America has been striving hard to raise its capital levels. This effort has resulted in success with respect to clearing the most difficult stress test (fourth round) conducted by the Federal Reserve. This implies that the company will be able to withstand another financial crisis.
However, BofA had not requested any permission for new capital deployment, so it will continue to pay 1 cent per share as quarterly dividend and will not be repurchasing any shares.
We are also concerned about Bank of America’s elevated cost structure. Though operating expenses started declining in the recent quarters due to the implementation of Project New BAC, we believe that as the company is in the process of addressing legacy issues and continues to invest in its franchise. Consequently, expenses will remain high in the near term.
Nevertheless, the company is poised to benefit from its large-scale operations and faster-than-expected improvement in credit quality.
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.
Following the announcement of first quarter results, the stock was up about 2.8% in before-market trade.
The shares of BofA retain a Zacks #3 Rank, which translates into a short-term Hold rating. Also, we maintain a long-term Neutral recommendation on the shares.
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