Shares of Bank of America (BAC) ended Wednesday's trading session roughly flat. Before the market open, Bank of America reported its third quarter results.
Third Quarter Results
Bank of America reported third quarter revenues of $20.7 billion, down 28.0% on the year. Excluding DVA and FVO adjustments, revenues rose 0.2% to $22.5 billion. On average, analysts expected the bank to generate revenues of $21.9 billion.
The bank reported a net income of $340 million. After paying preferred dividends the bank lost $33 million, or $0.00 per share. Analysts expected the bank to report a loss of $0.07 per share, but estimates covered a wide range.
Earnings were negatively impacted by a range of factors. The company took a $1.9 billion pre-tax charge related to valuation adjustments of Bank of America's credit spreads. The bank took another $1.6 billion in pre-tax litigation expenses, including the Merrill Lynch Class Action Settlement. The bank also took a $0.8 billion charge related to a reduction in UK tax rates. Total charges totaled $0.28 per share.
CEO Brian Moynihan commented on the results, "We are doing more business with our customers and clients: Deposits are up; mortgage originations are up; we surpassed 11 million in mobile customers; small business lending is up 27 percent year over year; and our corporate clients made us the second-ranked global investment banking firm. Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues."
Consumer and Business Banking
The consumer and business banking division reported revenues of $7.1 billion, down from $8.1 billion in the third quarter last year. Revenues fell as a result of the Durbin Amendment implementation for debit card fees. The division reported a net income of $1.28 billion, compared to $1.66 billion last year. Deposit balances grew 3% on the year to $480 billion. The bank issued 400,000 BankAmerica Cash Reward cards to a total of 1.7 million cards issued since the start.
Consumer Real Estate
Revenues from the mortgage division rose from $2.8 billion last year to $3.1 billion in 2012. Net losses narrowed from $1.1 billion to a loss of $877 million in the third quarter this year. Just like other big banks Bank of America is benefiting from the recovery in the housing market. The division continues to report losses as a result of litigation expenses.
Global Wealth Management
Revenues for the global wealth management remained roughly unchanged at $4.3 billion. Net income rose from $362 million to $542 million on the back of a decline in operating expenses. The bank reported a strong growth in assets under management to $707.8 billion. Total client balances rose to $2.26 trillion.
Revenues for the global banking division rose from $4.0 billion to $4.1 billion. Net income rose to $1.3 billion on the back of strict cost control. The bank was ranked number 2 in global investment banking fees.
Revenues from the global market division fell from $3.3 billion to $3.1 billion. Excluding the DVA adjustment, revenues rose from $1.5 billion to $3.7 billion. Sales and trading conditions for fixed income, currencies and commodities grew as market conditions improved.
Bank of America ended its third quarter with $2.17 trillion in total assets, down 2.5% on the year. The bank significantly boosted its Tier 1 common capital to $136.4 billion, up $19 billion on the year. The Tier-1 Basel I common capital ratio came in at 11.4%. Under Basel III conventions, the Tier-1 common capital ratio came in at 9.0%
For the first nine months of 2012, Bank of America generated total revenues of $64.7 billion. The bank reported a net income of $2.4 billion attributable to shareholders, or $0.22 per diluted share. Bank of America could report annual revenues of $85-$90 billion for 2012. The bank is on track to report a modest net income for the year.
Currently, the market values Bank of America at roughly $102 billion. This values the bank at 1.2 times annual revenues. The bank trades at a high price-earnings ratio, on the back of one-time charges and DVAs. The bank's tangible book value comes in at $13.48 per share. Investors are still not at comfort with the Bank's valuation of assets. Shares are valued at just 0.7 times tangible book value.
Currently, Bank of America pays a quarterly dividend of $0.01 per share, for an annual dividend yield of 0.4%.
Since the start of 2012, shares of Bank of America have risen some 70%. Shares started the year at $5.50 in January and almost doubled to $10 in March. Shares fell back to levels around $7 in the summer months, but steadily recovered to levels at $9.50 at the moment.
Together with Citigroup (C), shares of Bank of America have seen an incredible downturn over the past five years. Shares fell from $50 at the end of 2007 and hit lows of $4 in the beginning of 2009. Shares moved between $5 and $10 since that moment in time.
Despite the crisis, Bank of America has boosted its total assets from $1.82 trillion to $2.17 trillion at the moment. The bank reported billion dollar losses in 2009 and 2010, and broke even in 2011. Between 2008 and the third quarter, the number of shares outstanding rose by some 150% to 11.5 billion.
Bank of America had a decent performance over the past quarter. The bank significantly boosted its capital position and its capital ratios. The banks remains plagued by some issues, including claims of $25 billion related to the acquisition of Countrywide Financial.
I remain unconvinced about the long term prospects for the bank. Core earnings are disappointing and the widespread range of activities lacks strategic focus. Similarly to Citigroup, the lack of focus and bad performance during the crisis makes it my least favored financial. Investors which like exposure to traditional banking could pick up Wells Fargo (WFC), while those willing to invest in investment banking should favor J.P. Morgan (JPM).