Where Is Bank Of America Heading?

| About: Bank of (BAC)

By Cagdas Ozcan

Bank of America (NYSE:BAC) released its 1st quarter earnings. The banking giant reported significantly improved earnings. Yet, investors received the news not with optimism, but in a negative light. As a result, BAC shares took a plunge on the day the financial report was released. By the end of the day, BAC shares lost 4.72%. The report highlights remarkable growth across different bank segments. But apparently that was lower than what investors were expecting from Bank of America.

Key Highlights

One of the main highlights of BAC's 1st quarter financial report is the eye-popping 271.43% net income growth. The first quarter ended with very impressive net income amounting to $2.6 billion. This is an improvement from the previous quarter net income of only $0.7 billion. Diluted earnings per common share also increased from $0.03 in the previous quarter to $0.20 EPS.

Total revenue net of interest expense and FTE basis also increased to $23.708 billion. This is a 25.55% increase from the previous quarter at only $18.891 billion. But compared to the same period the prior year, this only saw a slight increase by 5.4% from $22.485 billion.

Other key highlights include the 5% increase in deposit balances, amounting to $1.1 trillion. The first-lien mortgage production also saw a striking growth of 57% at $24 billion. The commercial loans, on the other hand, ended with $367 billion balances, up by 17% from the previous quarter. Meanwhile, the consumer credit loss rates were minimized to five-year lows.

Perhaps one of the things that trigger concerns among the investors is the bank's increased exposure to loans. BAC funded home equity loans and residential home loans amounting to $25 billion. This amount is 11% higher compared to the previous quarter, and a 56% increase from the same quarter of 2012. There were about 106,000 homeowners who benefited from the fund. From that number, about 2,700 are first-time homebuyer mortgages.

This only shows that the bank is more aggressive in its financing. This caused growing concerns on the bank's vulnerability to defaults. However, the Legacy Assets and Servicing department have their hands full minimizing delinquents. The bank reported a decline in the number of 60+ days delinquent first mortgage loans. The numbers improved from 773,000 delinquent accounts in the previous quarter to only 667,000 accounts for the current quarter.

Another concern is the reported net loss of $1.3 billion in the Consumer Real Estate Services for the first quarter. This is an 18% increase from the previous quarter at only $1.1 billion net loss in the CRES.

While there are some concerns and declines, the major positive highlights still prevail. Overall, the bank's first quarter performance is very impressive compared to the previous quarter performance. The net income and the revenue growth should be compelling enough. However, that did not catch so much attention as to raise the investors' confidence on BAC.

While BAC improved its EPS from $0.03 in the previous quarter to $0.20, it missed analysts' estimates at $0.22. This is probably among the triggers of the selloff. Annualizing this figure, BAC will have a P/E multiple of 14.

Share Performance

On the trading floor, the scenario was not favorable to BAC after its earnings call. BAC shares plummeted from $12.28 to $11.70 on April 17. It further slid towards $11.23 during the intraday trading before closing at $11.44 on the following day. As of April 22, BAC shares lost 2.58% year-to-date at $11.72 per share. For the month of April, shares lost 3.54%.

However, BAC is not at all downbeat for the entire year 2013. In fact, a short rally was seen in March after a minor plunge in the last weeks of February. The year high was reached during the intraday trading on March 19 at $12.94, with YTD growth of 7.56%. But it eventually settled down to close at $12.71 per share.

The month of February was not a good one for BAC shares. The prices notably retreated from a month-high of $12.25 on February 12 to $11.03 on February 25. After 8 trading days, shares lost 9.96%. This was partly triggered by BAC's announcement to provide National Mortgage Settlement Programs to 370,000 Bank of America's customers. This was part of the bank's meaningful relief program giving housing mortgages at reduced rate. The program amount was $30 billion. Obviously, some investors can't help but worry about the move considering the bank's increasing exposure to possible future defaults.

Not only that, the prior week on February 14, Bank of America rolled out the Community Development Lending and Investing program. Bank of America Merrill Lynch provided approximately 11,000 affordable housing units amounting to $2.6 billion. So the total mortgage exposure of the bank increased to $32.6 billion. This makes it more volatile in the eyes of the investors, causing the slump in share prices.

However, BAC shares immediately bounced back in the ensuing weeks. After hitting the year bottom on February 25 at $11.03, shares rallied back to the $12 level. It eventually hit the year high at $12.78 on March 20.

Perhaps investors eventually realized that the increase in the number of housing mortgages will also mean increase in profits. But profits will only be realized if the accounts are properly managed and the defaults are minimized.

The last quarter result saw a decrease in 60+ days defaults. This shows that the bank is now focused on profitability. Quarter-over-quarter, BAC's profitability improved to 4.68% from 2.76%. There are many reasons for the improvement, and one of them is cross-selling.


Despite slowing down in April due to missed targets, BAC has the potential to rebound. It is backed by radically improved financials and profitability. Even with the recent slump in share prices, BAC is still trading almost 80% higher than its 52-week lows. Therefore, the stock is strong, and the company has the financials to back the stock's performance. While concerns remain over company's future, it is too big to fail. Having a market capitalization of $126.8 billion, it is relatively a safe investment with enough room for capital appreciation. It might even offer substantial dividends in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.