Getting Past The Financial Crisis: Bank Of America Earnings

| About: Bank of (BAC)


Bank of America recently settled major housing and credit card related investigations.

Revenue is in decline. The consensus estimate is for $22.3 billion for the quarter, compared to $23.5 billion a year ago.

There have been some job cuts in the Global Trading and Investment Banking Division. Cost cutting is necessary to maintain earnings in a declining revenue environment.

Consensus is for 27 cents a share in earnings, compared with 20 cents a share a year ago.

CEO Brian Moynihan has showed crisis management skills and brought back a dividend. Can he transition into profit making?

This earnings season has been a mixed bag for financials. JPMorgan (NYSE:JPM) kicked off with a major miss on Friday, while others like Wells Fargo (NYSE:WFC) and Citigroup (NYSE:C) beat earnings expectations despite declining revenues. The prospect of an end to quantitative easing and rising federal funds rate is still being digested. Bank of America (NYSE:BAC) will be the next company to go through the gauntlet when they report earnings Wednesday before market open. As is often the case, expectations have fallen sharply in the run up to reporting. Wall Street currently estimates 5 cents a share in GAAP earnings. When evaluating companies, it is often more useful to consider adjusted earnings. Here the consensus estimate is 27 cents per share, a 7 cent rise from 2013. If Bank of America beats these expectations, it will clear up uncertainty surrounding the turnaround. There are a few key concerns going into the announcement.

Last month, Bank of America agreed to pay $9.3 billion to settle disputes with Fannie Mae and Freddie Mac over subprime mortgages. Bank of America still holds a huge portfolio of troubled assets from the Countrywide merger. This agreement puts the legal liability of the housing bust behind the bank, a major relief for shareholders. Citigroup recently announced that they significantly reduced troubled asset provisioning. A similar move by Bank of America could run through to earnings. Signs from the housing market are less encouraging. April Homebuilder confidence climbed to 47 this month from a revised 46 in March. Stagnation in sales and prospective buyer traffic weighed on outlook related gains. A report tomorrow on housing starts is projected to show a significant increase to 970,000 from 907,000 in March, but weaker-than-expected confidence could be weighing on builders plans. New mortgage originations are an important revenue stream for Bank of America and help fund other assets.

Another important part of Bank of America is the Global Trading and Investment Banking Division. A March announcement of a 5% cut in staff shows a proactive approach to dealing with declining revenue. Some market participants are actively considering the prospect of further job cuts to come as fixed income and equity trading face sectoral declines. Improving focus and efficiency could help Bank of America weather the storm. The head of the investment bank, Thomas Montag has a strong track record and higher salary than Moynihan.

CEO Brian Moynihan has done an admirable job in managing Bank of America through the financial crisis. He now faces the challenge of normalizing the situation, stemming revenue declines, and returning earnings to shareholders. With inflation on the rise and tightening on the schedule, this will not be easy. But at a huge discount to book value, Bank of America would be a major beneficiary of a return to normalcy in the financial sector.

When Bank of America reports earnings before market open, long-term investors should focus on the top-line and indications of risk taking in key divisions including mortgage originations, consumer loans, and global markets and trading. An adjusted EPS number of 27 cents or above would be a good indication of success on cost cutting initiatives.

Disclosure: I am short C, BAC. 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.

Additional disclosure: My position could change at any time.