Bank of America Corporation’s (BAC) fourth-quarter 2014 adjusted earnings of 32 cents per share came a penny ahead of the Zacks Consensus Estimate. However, after considering certain non-recurring items, earnings per share stood at 25 cents compared with 29 cents earned in year-ago quarter.
Higher provision for credit losses and lower revenues (owing to lower mortgage banking income and trading income) were the major headwinds. However, a well-controlled expense line partially supported the bottom line. Further, the quarter witnessed improved credit quality and strong capital ratios.
Following the footsteps of other major banks that have reported so far, BofA also depicted a dismal earnings picture. Shares of the company declined nearly 3% in the pre-market trading. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.
Investment banking performance deteriorated during the quarter. While Consumer and Business Banking, and Global Wealth and Investment Management showed year-over-year decline in net income, Consumer Real Estate Services and Global Markets reported losses. However, Global Banking showed year-over-year improvement in net income.
The company’s period-end assets declined from the prior quarter, reflecting its efforts to reduce market and credit risks as well as optimize the balance sheet for liquidity. Reduced long-term debt, attributable to maturities and improved funding costs, also featured among the positives.
Quarter in Detail
Fully taxable-equivalent revenues (net of interest expense), excluding DVA/FVA, amounted to $19.6 billion, down 12% from $22.3 billion in the prior-year quarter. Further, revenues lagged the Zacks Consensus Estimate of $21.1 billion.
Net interest income, on a fully taxable-equivalent basis, declined 10% year over year to $9.9 billion. Lower loan balances and yields were primarily responsible for this decline. Net interest yield deteriorated 26 basis points (bps) year over year to 2.18%.
Non-interest income declined 15% year over year to $9.1 billion, largely due to lower mortgage banking, and sales and trading results. These were, however, partially offset by higher card income, as well as investment and brokerage services income.
Non-interest expense was $14.2 billion, 18% lower year over year. The fall was due to lower litigation expense and reduced personnel expense. Moreover, the company’s aggressive cost-containment measures were successfully reflected in the expense line, as non-interest expense, excluding litigation costs, declined 8% year over year to $13.8 billion.
Book value per share as of Dec 31, 2014 was $21.31, compared with $20.99 as of Sep 30, 2014 and $20.71 as of Dec 31, 2013. Tangible book value per share as of Dec 31, 2014 was $14.43, compared with $14.09 at the end of the prior quarter and $13.79 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 Dec 31, 2014, ratio of nonperforming loans, leases and foreclosed properties was 1.45%, down 48 bps year over year. Quarter-end net charge-off ratio decreased 28 bps year over year to 0.40%.
Also, the provision for credit losses decreased 35% to $219 million. This was driven by improvement in the portfolio trends including increased home prices.
Capital Ratios
As of Dec 31, 2014, the company’s common equity tier 1 capital ratio (Basel 3 Transition) was 12.3%, up from 12.0% as of Sep 30, 2014. Tangible common equity ratio was 7.47%, compared with 7.22% as of Sep 30, 2014.
Our Take
Since the beginning of 2014, huge litigation expenses have been interrupting BofA’s recovery story. Further, the detection of an accounting error in the second quarter compelled the bank to revise its capital ratios downward. Nevertheless, the huge settlement in the third quarter removed overhang of worries related to the company’s wrongdoings prior to the crisis. We believe this, coupled with its underlying strength, will ensure BofA’s return to the recovery track going forward.
On the fundamental front, BofA has been continuously focusing on cost-containment measures, in addition to realigning its balance sheet in accordance with regulatory changes. We expect litigation and various regulatory issues to strain its results in the upcoming quarters as well, but the magnitude of outflow related to these will gradually lessen.
Currently, BofA carries a Zacks Rank #4 (Sell).
Among other Wall Street biggies, JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) have already come out with fourth-quarter and full year 2014 results. Further, Citigroup Inc. (C) reported results today, along with BofA.
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