On Friday, shares of Bank of America slide after the company post (yet another) surprise loss thanks to mortgage writedown issues.
The result was confusing and worrisome.
Chris Kotowski at Oppenheimer has a very good rundown of some key points.
First, the summary:
BAC’s 4Q10 results showed more evidence that the industry’s recovery trend is well entrenched. Core revenue trends in all business lines other than trading were stable and NPAs, NCOs and the net inflow of new problem assets (NNP) all declined. The results were however marred by weak trading and a bulge in expenses that was a feature of all the earnings reports this quarter, but neither of these items give us great agita. More concerning was that management provided a “preliminary estimate of possible upper range loss” of $7-$10B for private label put-back costs. While that amount could be absorbed, we fear that this becomes the staring point in negotiations for the other side, capping upside on the stock.
Here are his 5 key points:
■ We are incorporating a charge of $8.5B into our 4Q11 earnings estimate. While management took great pains to say that its estimate does not represent a probable loss, in our experience companies do not put numbers like this out for public consumption lightly. It will come at some point, we just don’t know when.
■ As a result of the charge we see growth in tangible book value constrained to about 4% in 2011, and see key capital ratios at year-end 2011 roughly flat with those at year-end 2010, whereas we otherwise would have expected almost 10% growth in TBV and 30-40BP to capital ratios.
■ The results were distorted by charges which distorted both revenue and expense items. Adjusting for these, operating revenues were between $26.7B and $27.9B (depending on whether one considers securities gains “operating”) versus our $27.0B estimate. Bulls will say they beat and bears that they missed. We say it was pretty darn close.
■ Adjusted pre-provision earnings (PPE) of $10.3B were right in line with expectations. NCOs were down 6%, NPAs down 5%, and the net inflow of new problems declined from $6.2B to $4.9B, a 66% reduction from the peak of $14.3B in 1Q09.
■ Were it not for Countrywide and the private label put-back issue we would be recommending the stock. While management tried to put a box around it on the call, and the size of the box is not distressing, we fear it becomes the basis for negotiation and subject to upward revision.