Bank Of America Set To Bounce Back

Jul.28.13 | About: Bank of (BAC)

Bank of America (NYSE:BAC) has consistently been in the top five and top three largest U.S. banks, so it shouldn't surprise anyone that the company also took a mighty drop with the 2008 Recession and the bank bailout program in the following years. Since that time, BAC's stock has meandered to the single digits and then slowly back up to the low teens in terms of value per share, providing newbies a buying chance to get into a big-name bank cheap, but also providing plenty of angst to longtime shareholders who expect better performance. In fact, if someone bought 100 shares at $8 per share a year ago he would be sitting on a gain of 75 percent growth as of mid-July 2013. However, the question remains - is Bank of America worth buying?

Surprise Performance

Closing the second quarter for 2013, however, BAC surprised all the experts and market watchers by posting a 70 percent jump in net profit in Q2. This sizable jump was attributed to cost-cutting imposed internally by the banking giant, which only had a 3.5 percent growth in gross revenue, and it paid off. Comparable performances from banking peers had greater gross revenue figures, but BAC was able to shave off 6 percent from its operating expenses, which made a big bottom line difference. Part of this savings figure came from two big sources - no longer paying out $1 billion in litigation expenses and some came from the layoff of 18,000 employees nationwide. The cutting effort has been part of a cost reduction program begun in 2011 with a target of $8 billion in savings per year. Reaching this figure has been an incremental process of cuts at a rate of $1.5 billion per quarter by Q4. The effort has shown in increasing net profit from quarter to quarter.

Sources and Status of Income

BAC's programs across the board are reporting better performance and income generation, but that doesn't mean it translated 100 percent to posted revenues. Consumer real estate continued to drag on the Bank's books, dropping another 16 percent for Q2. Further, fixed income, currency, and commodity exchanging dropped $300 million. This, fortunately, was offset by gains in retail brokerage sales, trading, investment banking, and asset management. Most of the sales and trading gains came from a 53 percent jump in successful equities selling and trading.

It's also important to note that past BAC's income figures have also been dragged down by continued losses associated with acquiring Countrywide Financial, at the insistence of the federal government. This purchase, costing BAC $2.5 billion back in 2008, continues to represent $40 billion in bad home loans as well as ongoing legal expenses. All of those figures have to be offset by incoming revenue gains for BAC to show a net profit. So doing so is a sizeable venture on paper, at least.

Net Value Went Down

However, despite the Q2 profits looking very good, equity watchers noted something else which has a bigger impact in terms of long-term BAC strategy. The Bank's net value decreased significantly. This trade off occurred as boosts and gains in interest and services income offset losses in bond holdings. While numerically on paper the Bank looked better, equity-wise it has lost assets due to bond portfolio losses.

In Summary

The bank sector as a whole has been improving, with other big names charging ahead. BAC is a little late to the table of improvement, but it too is performing better, getting leaner and producing bigger net profits as a result, far bigger than expected. That said, can BAC sustain this momentum? It's fairly early to say that the Bank is completely out of the woods. There are still quite a bit of bad loans and mortgages on the books, and the Feds are signaling a reduction soon in purchasing such securities off of banks. So at some point BAC will face the need to clean its own house once and for all.

The above said, many expect Bank of America to not only survive but to come out stronger, which will reward stockholders in the long run with rising valuations. So for a buy-and-hold type, the BAC picture looks promising. It's not such a good bet for short-term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.