Bank of America Corporation’s (BAC) second quarter 2011 loss of 90 cents per share was a penny narrower than the Zacks Consensus Estimate, and compares unfavorably with earnings of 27 cents in the prior-year quarter.
BofA’s decision to settle its legacy Countrywide mortgage repurchase and servicing claims had a severe impact on second quarter results. However, the negatives were partially offset by lower credit costs, gains from the sale of non-core assets and debt securities, improved sales and trading revenues, as well as higher asset management fees and investment banking fees.
Excluding certain mortgage-related and other nonrecurring items, the company earned 33 cents per share during the reported quarter.
The settlement of nearly the entire legacy Countrywide mortgage repurchase and servicing claims is expected to remove a substantial uncertainty regarding its potential mortgage repurchase liability.
The core results were aided by lower provision for credit losses. However, a lower top line and higher non-interest expense were the downsides.
Quarter in Detail
Fully taxable-equivalent revenues (net of interest expense) were $13.5 billion, down 54% from $29.5 billion in the prior-year quarter. It also missed the Zacks Consensus Estimate of $25.3 billion.
Net interest income on a fully taxable-equivalent basis was $11.5 billion, down 13% from $13.2 billion in the year-ago quarter. Net interest yield decreased 27 basis points (bps) year over year to 2.50%. The decrease in yield was due primarily to lower consumer loan balances and yields.
Non-interest income came in at $2.0 billion, down 88% from $16.3 billion in the prior-year quarter. The decline was due primarily to a $12.8 billion increase in the representations and warranties provision from the year-ago period.
Non-interest expense was $20.3 billion, up 17% from $17.3 billion in the prior-year quarter.
Book value per share as of June 30, 2011 was $20.29, compared to $21.15 as of March 31, 2011 and $21.45 as of June 30, 2010.
Credit Quality
Overall credit costs continued to decline due to improving economic conditions. Also, credit quality showed an improvement during the quarter with net charge-offs declining across all portfolios from the prior-year quarter. Provision for credit losses decreased 15% sequentially and 60% year over year to $3.3 billion. The provision included net reserve reductions of $2.4 billion driven by consistently improving delinquency, collection and bankruptcy trends across the Global Card Services portfolios.
Nonperforming loans, leases and foreclosed properties ratio decreased 18 bps sequentially and 51 bps year over year to 3.22%. The net charge-off ratio improved 17 bps sequentially and 154 bps year over year to 2.44%.
Capital Ratios
At the end of the reported quarter, the company’s Tier 1 capital ratio was 11.00%, compared with 11.32% at the end of prior quarter and 10.67% at the end of prior-year quarter. Tier 1 common ratio was 8.23%, compared with 8.64% at the end of the prior quarter and 8.01% at the end of prior-year quarter.
Competitive Landscape
BofA’s competitors ––JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C)–– upheld the banking banner with impressive results last week.
JPMorgan’s second quarter earnings came in substantially ahead of the Zacks Consensus Estimate. The surprising numbers were primarily supported by a substantial slowdown in provision for credit losses and higher net revenue, which more than offset an increase in non-interest expense and lower net interest income. Investment banking results witnessed a significant improvement from the prior-year quarter owing to higher revenue and lower non-interest expense.
Citigroup also surpassed the Zacks Consensus Estimate. The better-than-expected results were driven by a drop in provisions for credit losses. While the top-line headwind at Citigroup continued with revenue dropping from the prior-year period, the figure managed to exceed the Zacks Consensus Estimate. However, expenses also increased year over year.
Our Viewpoint
We are primarily concerned about BofA’s elevated cost structure. Non-interest expense increased significantly during the last few quarters. As the company is in the process of addressing legacy issues and continues to invest in its franchise, expenses are expected to remain high throughout 2011.
On the other hand, dividend increases are still uncertain for BofA. The company’s plan to boost dividend was rejected by the Federal Reserve following the release of second round stress test results in March. BofA needed to show the Fed even greater financial strength, in case it needs to battle another downturn. However, given the weak results, it’s difficult for BofA to show financial strength anytime soon.
Nevertheless, the company is poised to benefit from its large-scale operations and improving credit quality. Additionally, BofA would benefit from its efficiency initiative program.
Shares of BofA retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
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