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Dow 30 Earnings: Bank of America - Fourth Quarter 2011
Bank of America (BAC - Free Bank of America Stock Report), Investors reacted favorably after Bank of America, one of the world's largest financial institutions and a component of the Dow 30, reported December-quarter earnings of $0.15 a share. The stock, which rose nearly 5% the day prior to the earnings report, moved somewhat higher after earnings were announced.
The $0.15 a share earned in the final period of 2011 compared positively with the $0.16-a-share loss booked in the year-earlier quarter and approximated our estimate of $0.17. Still, the result fell short of the $0.56 logged in the September period. For 2011 as a whole, BofA earned a penny a share compared with our estimate of breakeven results and the loss of $0.37 a share that it recorded in 2010.
Unusual items were less significant in the December quarter than in the prior period, adding about a dime to share net in the latest quarter as compared with our estimate of most of reported results in the September interim. In the final period of 2011, BofA booked gains on the sale of its interest in China Construction Bank, on debt securities, and trust preferred securities exchanges, which were partly offset by various negative accounting adjustments and mortgage-related litigation and other costs.
Net interest revenue in the quarter declined over 10% year to year due to lower consumer loans and securities yields, but rose slightly compared with the September interim, helped by reductions in long-term debt, the interest rates on deposits, and in accounting charges. Noninterest income was a mixed bag, increasing 6% from the 2010 like quarter aided by higher mortgage banking and equity investment income (including the gain on the sale of the CCB investment), partly offset by lower card services (including the impact of new restrictions on debit card fees) and trading account profits. Credit costs fell both year to year and on a sequential-period basis. The company started realizing some of the benefit of a cost-reduction initiative, but higher litigation, FDIC, severance, and default servicing costs pushed up expenses compared with the September quarter.
Looking ahead to 2012, we are maintaining our conservative share-net estimate of $0.80 for the year. Expense savings generated by the company's New BAC program probably will provide the biggest impetus for the bottom-line improvement. In 2012, BofA expects to realize over 20% of New BAC's $5 billion of ultimate expense savings target, aided by personnel reductions and possibly lower mortgage costs. Credit costs should also trend lower, although reductions in the loan loss reserve may be smaller in 2012 than in 2011.
The outlook for revenue growth remains challenging, however, given prospects for uneven economic activity in the United States, increased regulation, the ongoing financial crisis in the euro zone, and continued historically low interest rates. Modest core commercial loan growth probably will be partly offset by the impact of divestitures and loans in run-off portfolios. But net interest income may not grow much, if at all, due to further margin compression. Consumer-related fee income should improve as economic activity picks up. Management expects trading revenues to strengthen. And new small business banker and financial advisor hires should bring in more business as the year unfolds. But these favorable factors may be partly offset by the absence of 2011's divestiture gains and continued weak investment banking activity.
In spite of the recent spurt in the stock price, BofA shares have better-than-average recovery potential to mid-decade. But we still think all but very aggressive investors may want to defer commitments until the company is a little further along the recovery track. With regard to the dividend on the common stock, we believe the company will remain cautious about raising the payout, with an increase not likely until beyond 2012.
About The Company: Bank of America was formed by the merger of NationsBank with BankAmerica in September of 1998. As a financial holding company, it provides banking and financial services to individuals, corporations, and governments worldwide. Acquisitions over the years include FleetBoston Financial, MBNA, LaSalle Bank, Countrywide, and most recently, Merrill Lynch. In total, the bank has about 6,000 offices in 29 states & Wash. D.C.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.