Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message|
( followers)  

Investors were clearly unimpressed by Bank of America’s (NYSE:BAC) results for the first quarter of the year – something made clear by the near-5% decline in the banking giant’s share price over trading on Wednesday, after its earnings announcement [Bank of America Reports First-Quarter 2013 Net Income of $2.6 Billion, or $0.20 per Diluted Share, Bank of America Press Releases, Apr 17 2013]. This decline was amid a weak day across the board for financial stocks. The revenue figure of $23.5 billion and the net income tally of $2.6 billion, both fell short of expectations and investors were also not too happy about the sequential reduction across revenue streams, barring investment banking operations. And the litigation expenses of $881 million for the quarter only served as a reminder of the mortgage-related legal overhang that still remains strong.

But there are quite a few things that have gone right for the Bank of America. Most notably, the bank bucked the trend reported by peers Wells Fargo (NYSE:WFC), JPMorgan Chase (NYSE:JPM) and U.S. Bancorp (NYSE:USB), of a sequential decline in net interest margin (NYSE:NIM) figures over recent quarters. This is a commendable feat, considering the fact that Bank of America’s operations are not as geographically diversified as Citigroup (NYSE:C), which is the only other bank to report a higher Q1 NIM. Also, the bank’s non-interest expenses of $18.2 billion for the quarter were a good $1 billion lower than that for Q1 2012, and about $200 million lower than the figure for Q4 2012. This would indicate that the organization-wide changes implemented as a part of Project New BAC, are actually yielding results.

We stick to our $13.50 price estimate for Bank of America’s stock, a figure that is about 15% ahead of its current market price.

Investment Banking Operations Carried Results This Time Around

Q1 2013 wasn’t a really a great period for traditional loans-deposits banking services in the U.S. – something that shows through in the performance of all the banks who have reported earnings till now. The prevalent low interest rate environment coupled with macroeconomic concerns stemming from Europe’s precarious situation and the U.S. budget stalemate are largely responsible for this.

But the story is very different for investment banking services that ironically benefited over the period due to the low interest rates. The increasing demand for high-yield investment options among investors has resulted in strong growth in global debt capital markets issuance. Investors have also taken on additional risks and ventured into equity markets, resulting in rallies for indices across the world. Investment banks benefited from these developments by pocketing handsome underwriting fees as well as by capitalizing on uptick conditions, to lock in trading gains.

Bank of America investment banking operations reported the best quarterly revenues since early 2011, with the fixed-income trading desk churning revenues of just under $4.4 billion and the equities trading desk chipping in with another $1.2 billion.

Can’t Write-Off Bank of America’s Mortgage Operations Yet

Bank of America has incurred billions in charges on its mortgage portfolio since the downturn of 2008, and has consequently reduced its exposure to the mortgage industry over the years. And even as the size of bank’s outstanding mortgages continues to shrink ($91 billion at the end of Q1 2013 vs. $95 billion at the end of Q4 2012), a welcome change in the business is the steady increase in mortgage origination volumes over the last three quarters.

This is a marked reversal in the strategy witnessed till mid-2012, when the bank had virtually stopped originating new mortgages with refinanced mortgages being the only component in the total mortgages originated. Now that the refinancing wave has subsided, the increase in mortgage originations is a sign of healthy recovery in the bank’s operations. Quite notably, with $25 billion in mortgages originated this quarter, Bank of America overthrew U.S. Bancorp to become the third largest mortgage originator in the U.S. for Q1 2013, behind Wells Fargo and JPMorgan.

Disclosure: No positions

Source: Don't Ignore The Positive Trends Underlying Bank Of America's Results