Bank of America (BAC - Free Bank of America Stock Report) shares fell rather notably in Wednesday morning trading, in a decidedly weaker market, after the company, one of the largest banks in the United States and a component of the Dow 30, reported somewhat disappointing March-quarter earnings that nonetheless beat its results in the year-earlier period.
The company earned $0.20 a share in the opening period of 2013 compared with our estimate of $0.19 and results of only $0.03 in the year-earlier quarter, when earnings were reduced by significant negative accounting items. Absent the valuation losses and adjustments, net of a nonrecurring gain last year, revenues and pretax earnings would have declined 9% and 13%, respectively.
Strong investment banking and wealth management revenues, as well as lower credit costs and operating expenses, offset declines in net interest income and in credit card, service charge, mortgage banking, and trading revenues compared with the year-earlier period.
Revenue growth was uneven, and we expect it to remain so over the balance of 2013. Net interest income was hurt by lower consumer loans and yields, and fewer days in the quarter. Business loans rose, however. The company has been downsizing its branch network, as it moves to more self-service channels, like mobile banking. Given the mixed outlook for loan growth and prospects of continued low interest rates, however, we expect net interest income in the next few quarters to roughly match the March-period tally. Increased regulation and competition probably contributed to the decline in service charge revenues.
Although mortgage originations rose, margin compression depressed mortgage production revenues. Losses in the legacy mortgage servicing business continued to decline, despite higher litigation costs. The mortgage servicing portfolio has been shrinking, which lowers related staff costs. The company has been expanding its mortgage origination staff, however. While this adds to costs, as these mortgage bankers get up to speed, mortgage origination revenue should benefit.
Meanwhile, despite higher incentive costs in the investment banking business, core expenses on a consolidated basis declined, reflecting progress under the company's New BAC expense-reduction program, which aims to lower expenses by $8 billion. At the end of 2012, BofA had realized 45% of the cost savings. It expects savings to reach the 75% mark by the end of 2013. In addition, costs in the legacy mortgage servicing business should fall another $500 million by the end of this year. Mortgage-related litigation expenses also ought to moderate as the company resolves more claims that it buy back mortgages sold to investors in past years. It recently agreed to settle three class action lawsuits related to loans made by the former Countrywide Mortgage, which BofA acquired in 2008.
Credit-quality trends were generally favorable in the period. Loan losses, problem assets, and past-due consumer credits all fell nicely. The company probably has a little more room to pare its loan loss reserves in the next several quarters, though it probably will benefit less from reserve reductions in 2013 than it did last year.
In all, we are maintaining our 2013 share-net estimate of $0.85, given the mixed outlook for revenue growth. Note that earnings per share will benefit from stock repurchases. In the recent round of bank stress tests, the company's plan to buy back up to $5 billion of its common stock in the next 12 months and redeem $5.5 billion of its preferred was approved by regulators. For 2014, we are introducing an earnings estimate of $1.00 a share, with the increase mostly supported by further reductions in credit costs and expenses.
The company seems to be slowly turning the corner. But the stock has turned in a strong performance since mid-2012, and risk-averse investors may want to take note of this. Too, we think a dividend increase is still on the back burner until the company establishes a consistent earnings pattern and due to the pressure on banks to meet new stricter capital guidelines.
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.