Putting an end to the concerns surrounding Bank of America Corporation’s (BAC) Q3 earnings following its huge settlement with the DoJ and other government entities, the company came out with a profit of $168 million. Adjusted earnings per share came in at 42 cents, compared with the Zacks Consensus Estimate of a loss of 9 cents. This also compares favorably with 28 cents per share earned in the year-ago quarter.
Results exclude 43 cents a share (after tax) negative impact related to the previously mentioned settlement. Considering this one-time item, the company has reported a loss of one cent per share.
The results indicate that the bank is not behind the other major banks that have reported so far, in terms of core business strength.
A well-controlled expense line was the key driver of this impressive performance, before considering litigation expenses. A better-than-expected top line, though down year over year, also lent support. However, higher provision for credit losses was on the downside.
Shares of BofA declined over 2% in the morning trade, implying that the market is not that encouraged with this earnings performance. The price reaction during the full trading session will give a better sense about how investors accepted the results.
The quarter witnessed improved credit quality and higher brokerage assets. However, lower mortgage banking income and equity investment income were the dampeners.
Investment banking performance remained decent with overall fees increasing 4% year over year. While Consumer and Business Banking showed solid income growth over the year-ago quarter, losses in Consumer Real Estate Services increased significantly. However, Global Wealth and Investment Management, Global Banking and Global Markets showed year-over-year improvement in net income during the quarter.
The company’s period-end assets declined from the prior quarter, reflecting its efforts to reduce market and credit risk as well as optimize the balance sheet for liquidity. Reduced long-term debt due to maturities and improved funding costs were also among the positives.
Quarter in Detail
Fully taxable-equivalent revenues (net of interest expense) were $21.4 billion, down 1% from $21.7 billion in the prior-year quarter. However, revenues beat the Zacks Consensus Estimate of $21.3 billion.
Net interest income on a fully taxable-equivalent basis was $10.4 billion, marginally down from the year-ago quarter. Reduced yields on debt securities were primarily responsible for this decline. Net interest yield deteriorated 4 basis points (bps) year over year to 2.29%.
Noninterest income declined 2% year over year to $11 billion. Lower mortgage banking and equity investment income were primarily responsible for the downfall.
Noninterest expense was $19.7 billion, 20% higher year over year. Higher mortgage-related litigation expense was partially offset by lesser personnel expense. However, the company’s aggressive cost containment measures were evident in the expense line as noninterest expense, excluding litigation expense, declined 7% year over year to $14.2 billion.
Book value per share as of Sep 30, 2014 was $21.03 compared with $21.16 as of Jun 30, 2014 and $20.50 as of Sep 30, 2013. Tangible book value per share as of Sep 30, 2014 was $14.13 compared with $14.24 at the end of the prior quarter and $13.62 at the end of the year-ago quarter.
Credit Quality
Credit quality continued to improve during the quarter with net charge-offs declining year over year across most major portfolios.
As of Sep 30, 2014, nonperforming loans, leases and foreclosed properties ratio was 1.61%, down 56 bps year over year. Quarter-end net charge-off ratio decreased 2 bps sequentially and 27 bps year over year to 0.46%.
However, the provision for credit losses increased significantly year over year to $636 million. This was due to an incremental costs of $400 million associated with the consumer relief portion of the DoJ settlement.
Capital Ratios
At the end of the reported quarter, the company’s common equity tier 1 capital ratio(Basel 3 Transition) remained flat with the end of the prior quarter at12.0%.Tangible common equity ratio was 7.24% compared with 7.14% at the end of the prior quarter and 7.08% at the end of the prior-year quarter.
Our Viewpoint
Huge litigation expenses since the beginning of 2014 have been interrupting BofA’s recovery story. Further, the detection of an accounting error in the second quarter led it to revise capital ratios downward. However, the mega settlements remove overhang of worries related to its wrongdoings prior to the crisis and ensure its near-term return to the recovery track based on underlying strength. On the fundamental front, in addition to realigning its balance sheet in accordance with regulatory changes, the company has been continuously focusing on cost containment.
We expect litigation and various regulatory issues to stain its results in the upcoming quarters as well, but the magnitude of outflow for these will gradually lessen.
Among other banking giants, JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC) and Citigroup Inc. (C) have come out with third-quarter results so far. Despite the continued tough industry backdrop, all these big banks managed to report decent earnings.
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