OK Bank Of America, Good Job Raising Cash But You’ve Still Got This Serious Problem To Worry About


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Bank of America’s positive earnings report sent financials on a healthy run yesterday. Glasses raised all around.The bank has a lot to celebrate. Most importantly, they managed to raise their Tier 1 common equity ratio faster than they expected. Now it’s at 9.86% (from 8.65%) which puts the bank closer to a healthy 10% range.

It is safe to say the bank is in a better position now than it was a year ago.

But there are still significant problems, according to Oppenheimer’s dive into Bank of America’s earnings report, the bank still has a huge problem with profits and losses (P&L).

To put it concisely, Bank of America’s earnings were boosted by one-time asset sales. Without those, the picture isn’t as pretty. Oppenheimer isn’t the only one who has pointed this out, but here’s their clear walk-through:

There were eight identified “special” items for the quarter which added $1.6B net to pretax net income. To this we might add a $1.2B MSR gain and a $1.1B reserve release. In addition, the company benefited from a $0.4B recovery from the sale of charged-off card receivables. Thus the true “operating” number is somewhat in the eyes of the beholder, but the lines of the income statement that should be generally straightforward and transparent were generally a bit weaker than expected: net interest income by $0.3B, trading by $0.7B, investment & brokerage by $0.3B, and expenses over by $0.7B.

Even the one bright spot on their income statement has a little smudge on it:

The one line item that did beat expectations was mortgage banking, but this benefited from the $1.2B MSR gain… The key question for BAC shareholders is what the core earnings power will be when all the noise subsides. While the ultimate cost of the mortgage put-backs may still influence the denominator, we still see “normalized earnings” in the range of $1.30-1.60.

According to their earnings call (and their behaviour over the last year), Bank of America embarking on a cost cutting rampage — so perhaps by their next earnings call they’ll be a more svelte organisation. That could make up for the loss of these one-time profit boosts. We’ll see.