BofA Disappoints on Writedown - Analyst Blog

Bank of America Corporation's (BAC) fourth quarter earnings came in at 4 cents per share, substantially lower than the Zacks Consensus Estimate of 19 cents. However, this compares favorably with the loss of 60 cents in the prior-year quarter.

Earnings for the reported quarter excluded a previously announced goodwill impairment charge of $2 billion related to its Home Loans and Insurance business. Considering this charge, BofA reported a net loss of $1.2 billion or 16 cents per share, compared with a net loss of $194 million or 60 cents per share in the year-ago quarter. Results for the year-ago quarter included a $4 billion charge related to Troubled Asset Relief Program (TARP).

Results were also marred by a $3.0 billion increase in provision expense related to the Government Sponsored Enterprises (GSEs) and $1.5 billion in litigation expenses.

Lower credit costs, higher net interest income and increased card income were among the positives. However, reduced mortgage banking income, lower non-interest income and higher non-interest expense were the downside.

For full year 2010, excluding a goodwill impairment charge of $12.4 billion, the company earned 86 cents per share, compared with a loss of 29 cents in 2009. Results missed the Zacks Consensus Estimate of $1.03.

Quarter in Detail

Fully taxable-equivalent revenues net of interest expense were $22.7 billion, down 11% from $25.4 billion in the prior-year quarter. This also compares unfavorably with the Zacks Consensus Estimate of $25.5 billion.

Net interest income on a fully taxable-equivalent basis was $12.7 billion, up 7% from $11.9 billion in the year-ago quarter.

As a result of the accumulation of higher-yielding loans on the balance sheet, net interest yield increased 7 basis points (bps) year over year to 2.69%.

Non-interest income came in at $10.0 billion, down 26% from $13.5 billion in the prior-year quarter. The decline was due to lower service charges, depressed mortgage banking income, reduced equity investment income and trading account profits.  

Excluding the goodwill impairment charge of $2.0 billion, non-interest expense was $18.9 billion, up 15% from $16.4 billion in the prior-year quarter. The growth in non-interest income reflects higher personnel costs, increased professional fees and litigation costs. Pre-tax merger and restructuring charges declined to $370 million from $533 million in the year-ago quarter.

The efficiency ratio on a fully taxable-equivalent basis was 92.04% compared with 64.47% in the prior-year quarter.

Book value per share as of December 31, 2010 was $20.99, compared to $21.17 as of September 30, 2010 and $21.48 as of December 31, 2009.

Credit Quality

Though overall credit costs declined for the sixth consecutive quarter due to improving economic conditions, it still remained at elevated levels. However, creditquality showed an improvement during the quarter. Provision for credit losses decreased 5% sequentially and 49% year over year to $5.1 billion. The provision was $1.7 billion lower than net charge-offs, resulting in a reduction in the allowance for loan and lease losses.

Nonperforming loans, leases and foreclosed properties decreased 23 bps sequentially and 50 bps year over year to 3.84% of total loans, leases and foreclosed properties. Net charge-off ratio improved 20 bps sequentially and 84 bps year over year to 2.87%.

Capital Ratios

At the end of the reported quarter, the company's Tier 1 capital ratio improved to 11.24% from 11.16% at the end of prior quarter and 10.40% at the end of prior-year quarter. Tier 1 common ratio also improved to 8.60% from 8.45% at the end of the prior quarter and 7.81% at the end of prior-year quarter.

Competitive Landscape

BofA's competitor The Goldman Sachs Group Inc. (GS) reported mixed fourth quarter results.

Though Goldman's fourth quarter profit came in slightly ahead of the Zacks Consensus Estimate, it fell 53% from the year-ago quarter. Slowdown in most of its major divisions due to increased competition and depressed client activity were primarily responsible for the earnings deterioration. European debt problems were also responsible for the lack of conviction among clients.    

Unlike Goldman, other two competitors JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) upheld the banking banner with impressive results.  

JPMorgan's fourth quarter earnings came in substantially ahead of the Zacks Consensus Estimate on higher non-interest revenue and a slowdown in provision for credit losses. As expected, Investment Banking witnessed an improvement over the prior quarter with better revenue and client flows. Most of JPMorgan's businesses performed well owing to its continued strategic investments.

Similarly, Morgan Stanley also surpassed the Zacks Consensus Estimate on the back of a sharp risein top line. The quarter also witnessed strong client franchise andimproved performance in almost all of its businesses. Like JPMorgan, Investment Banking segment of Morgan Stanleyexcelled during the quarter. However, these positives were partially offset by higher non-interest expenses.

Our Viewpoint

Though the company is poised to benefit from its large scale operations, prudent capital management and non-core asset shedding, concerns related to its exposure to bad home loans that were sold on improper documentation, inconsistent credit quality and the negative impact of the new financial reform law linger.

Earlier this month, BofA reached a settlement with Fannie Mae and Freddie Mac on outstanding repurchase claims related to certain residential mortgage loans sold to these GSEs by Countrywide Financial Corporation.

The settlement of residential mortgage loans sold by Countrywide is expected to help the company improve its financials in the long run.

Also, BofA has been conversing for a similar settlement with a group led by Pimco, the Federal Reserve Bank of New York and BlackRocks.

The shares of BofA retain a Zacks #3 Rank, which translates into a short-term Hold' recommendation. Also, considering the company's business model and fundamentals, we have a long-term “Neutral” recommendation on the shares.

 
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