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Dow-30 Earnings: Bank of America - Second Quarter 2012
Bank of America (BAC - Free Bank of America Stock Report), one of the largest banks in the United States and a component of the Dow 30, turned in better reported results in the June quarter, but still faces pressures on revenues and significant claims that it repurchase mortgages previously sold to investors. The stock, which rose more than 1% in premarket trading, later gave back all of that advance and then some, as investors apparently concluded that the road ahead will remain bumpy.
The company's June-period earnings of $0.19 a share matched our share-net estimate and compared favorably with the loss of $0.90 recorded in the year-earlier period, when the company recorded $18.2 billion, or $1.23 a share, of charges for mortgage-related matters. Excluding those one-time items, BofA would have earned $0.33 a share in the comparable 2011 period, well ahead of this year's tally.
Lower credit costs and falling operating expenses, in addition to the absence of the aforementioned charges, contributed to the improvement in reported results in the latest quarter. On the bright side, commercial problem assets and criticized (potential problem) exposures have been declining steadily over the past year. In addition, litigation expenses fell in the quarter, and cost savings from BofA's New BAC expense-reduction program continue to kick in.
Nonetheless, the going remained tough on the revenue front. Net interest revenue declined 15% year to year, reflecting lower consumer loan balances (partly due to intentional reductions) and the negative impact of low interest rates on investment securities yields, only partly offset by reductions in long-term debt. Fee-based revenues would have fallen similarly if last year's mortgage charges were excluded. On a consecutive-period basis, markets-related revenue declined. But card income and service charges, which were hurt by regulatory changes over the past two years, improved.
Looking ahead, we tentatively expect BofA to make further gradual bottom-line progress over the next several quarters. The still very low interest rate climate is a headwind, but further reductions in long-term debt should support some improvement in net interest revenue over the balance of 2012 and into 2013.
Meanwhile, prospects for noninterest revenue remain mixed. The crisis in the euro zone may continue to constrain market-based revenues, and mortgage repurchase costs probably will stay high for a while. Outstanding claims that the company buy back mortgages sold to investors jumped from $16.1 billion at the end of March to $22.7 billion on June 30th, and remain a concern.
But BofA expects to realize further cost savings from the first phase of its expense-reduction plan (a potential $5 billion by 2014) and is beginning to benefit from the second phase of the program (a additional $3 billion of cost savings over the next three years). Credit costs ought to continue falling, as well.
In all, we still look for the company to earn about $0.65 a share in 2012. At the same time, we are lowering our share-net estimate for 2013 by a dime, to $0.90.
The still depressed stock has good recovery potential to mid-decade for venturesome investors. But the company isn't out of the woods yet. Investors with below average risk-tolerance may want to defer commitments until BofA makes more progress resolving its mortgage repurchase problem and makes some headway in accelerating its revenue growth.
About The Company:Bank of America was formed by the merger of NationsBank with BankAmerica in September of 1998. As a financial holding company, it provides banking and financial services to individuals, corporations, and governments worldwide. Acquisitions over the years include FleetBoston Financial, MBNA, LaSalle Bank, Countrywide, and most recently, Merrill Lynch. In total, the bank has about 6,000 offices in 29 states & Wash. D.C.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.