BofA Disappoints on TARP Payback - Analyst Blog

Bank of America Corporation’s (BAC) fourth quarter 2009 loss came in at 60 cents per share, a nickel worse than the Zacks Consensus Estimate of a loss of 55 cents. This compares unfavorably with the loss of 48 cents in the prior-year quarter.

Results for the quarter included dividends on preferred stock and a $4.0 billion negative impact associated with repaying the bailout money. Since the end of 2009, BofA has been absolutely free from pay restrictions as it has repaid the full TARP funds.

The worse-than-expected results came in due primarily to challenges in the U.S. and global economies as well as stress on the consumer, which continues to result in high credit costs. However, credit costs were lower than the prior quarter.

Behind the Headlines

Improved non-interest income has also helped offset the negative impact of the TARP-related loss to some extent. Non-interest income increased as a result of an improvement in trading and much higher income from investment and brokerage services, equity investments and investment banking. However, net interest income was on the downside, which declined on a year-over-year basis as a result of lower asset liability management portfolio levels and reduced loan demand.    

During the reported quarter, a cash dividend of 1 cent per common share was paid and the company reported $5.0 billion in preferred dividends.

For full year 2009, BofA reported a loss of $2.2 billion or 29 cents per share, compared to a net income of $2.6 billion or 54 cents in the year ago.

Fully taxable-equivalent revenue net of interest expense was $25.4 billion, up 59% from $16.0 billion in the prior-year quarter, reflecting in part the addition of Merrill Lynch.

Net interest income on a fully taxable-equivalent basis was $11.9 billion, down 11% from $13.4 billion in the year-ago quarter.

Net interest yield decreased 69 basis points (bps) year-over-year to 2.62%. The decrease was a result of the addition of lower yielding assets from Merrill Lynch.

Non-interest income increased to $13.5 billion from $2.6 billion in the prior-year quarter. Reported non-interest income included a $1.1 billion gain on BofA's investment in BlackRock (BLK) as a result of its purchase of Barclay's (BCS) asset management business. On the negative side, there was a loss of $1.6 billion mostly related to mark-to-market adjustments on the Merrill Lynch structured notes, as BofA's credit spreads improved during the reported quarter.  

Non-interest expense increased to $16.4 billion from $10.9 billion in the prior-year quarter. The increase in non-interest income reflects higher personnel and general operating expenses, driven partially by the acquisition of Merrill Lynch. The increase was also due to an increase in pretax merger and restructuring charges to $533 million from $306 million in the year-ago quarter.

The efficiency ratio on a fully taxable-equivalent basis was 64.47% compared to 68.51% in the prior-year quarter. Book value per share of common stock as of Dec 31, 2009 was $21.48, compared to $22.99 as of Sep 30, 2009 and $27.77 as of Dec 31, 2008.

Questions Regarding Credit Quality

Though credit costs remained high, overall credit quality was mixed during the quarter. Though the provision for credit losses increased 18.5% on a year-over-year basis, it decreased 13.6% sequentially. Non-performing assets increased 5.7% sequentially to $35.7 billion, reflecting a slower rate of increase than in the recent quarters as a result of some early signs of economic recovery. Net charge-offs decreased 12.5% sequentially to $8.4 billion. Net charge-off ratio improved 42 bps sequentially to 3.71% but nonperforming assets ratio deteriorated 26 bps sequentially to 3.98%.

At the end of the reported quarter, the company’s Tier 1 capital ratio deteriorated to 10.40% from 12.46% at the end of prior quarter. Tier 1 common ratio improved to 7.81% from 7.25% at the end of the prior quarter.

The market turmoil was more harmful to BofA than to its peers. However, the company has concluded its biggest acquisitions. BofA acquired brokerage giant Merrill Lynch almost during the height of the financial crisis last year. It also acquired Countrywide Financial Corporation on July 1, 2008. The CEO views these deals as beneficial for stakeholders of the company. Furthermore, this will allow the bank to focus on rebuilding customer relationships.

Though BofA’s earnings benefited from the improvement in trading, investment and brokerage income, the company experienced continued net interest yield compression and a mixed credit quality. Additionally, since the acquisition of Merrill Lynch, BofA has had differences of opinion with regulators and lawmakers over Merrill's 2008 bonus payments issues amid escalating losses. We think the new CEO should focus on the integration of Merrill Lynch and smooth relations with regulators.

Struggling Along with Peers

Most of the major banks are suffering from losses related to mortgages and credit cards of their retail banking operations. Yesterday, in its earnings release Citigroup (C) said that its full year 2009 loss of $1.6 billion or 80 cents per share partly came from losses in its mortgage and credit card businesses. Similarly, JPMorgan Chase (JPM) said last week in its earning release that its full year net income of $11.7 billion or $2.26 per share, which more than doubled compared to 2008, was impacted by the outflow of money from its consumer and credit card businesses.

There were no upward estimate revisions over the last 7 days. Over the last 30 days, three of the analysts covering BofA have lowered estimates for full year 2010 while four moved in the opposite direction.

Almost the same number of estimate revisions for 2010 in both directions indicates no clear directional pressure on the performance of the stock in the upcoming quarters. As a result, the stock retains its Zacks # 3 Rank, which translates into a short-term 'Neutral' rating.

With respect to earnings surprises, the stock has fluctuated substantially over the last four quarters with two extreme positive and two extreme negative surprises. However, the average remained negative at 4%. This implies that BofA has fallen short of the Zacks Consensus Estimate by 4% over the last four quarters.

Since the announcement of results, the share price of BofA shot up briefly but has since decreased by a couple pennies.

Read the full analyst report on "BAC"
Read the full analyst report on "BLK"
Read the full analyst report on "BCS"
Read the full analyst report on "C"
Read the full analyst report on "JPM"
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