Sunday, May 13, 2012

Bank of America Earnings Miss, the Crapshoot Continues

Bank of America reported Q1 2012 financial results on Thursday, April 19.

Reports are in this morning for the quarterly crapshoot from Bank of America, the World's Most Unstable Bank. CEO Brian Moynihan continues cleaning up the carnage from the biggest debacle in banking history, left behind by delusional former CEO Ken Lewis, corrupt former Treasury Secretary Henry Paulson, inept former FDIC Chair Sheila Bair, and the numerous morons at the SEC. However, it's becoming obvious that the mindset hasn't changed and Moynihan is most likely the second coming of bankster Lewis.

The foremost problem is contingent liabilities, ongoing legacy losses, that surface and the lawsuits that result. After reserving billions of dollars, the worst of the incredible and extraordinary losses appear accounted for. But who really knows the extent of the losses plus who might someday go to prison as the fall guy?

GAAP earnings per share of $0.03 missed QoQ, YoY, and was short of the projected $0.12. There was some hype over excluding valuation adjustments and reporting EPS at $0.31. Pay no attention to management,  the stock pumpers and starry-eyed headline writers behind the curtain. For Bank of America management, rejoice in the day and be glad in it, you squeezed a few pennies from the junk pile. You had earnings per share, not loss per share! This is the third consecutive quarter of positive EPS, albeit humble, after the disastrous -$0.90 per share in Q2 2011.

Let's clarify the gawd awful, incredible mess that is called Bank of America: even the auditors don't know if their was net income or loss for this quarter. By the time a GAAP EPS of $0.03 is crafted, countless assumptions have been made regarding contingencies, reserves, valuations, accruals, and the finer points of accounting rules. Some of these are negotiated with management. Therefore the earnings per share is built upon reasonableness, materiality, estimates, and exorbitant auditing fees to pay for the liability insurance and sweet lifestyle.

All we can hope for is consistency each quarter to create a baseline. This same scenario also applies to Citigroup, among others. All this talk about DVAs, CVAs, FVOs and the wild quarterly multi-billion dollar swings as a result. Markets go up or down, then the valuations go up or down, then EPS goes up or down. This volatility overwhelms the core banking operations. CEO Moynihan talks about customer and client relationships and all sorts of nonsense while the traders, algorithms, and greed are churning away in the background.

Core banking operations diminished in the asset mix. Apparently there is not enough upside in this boring endeavor.  Net loans decreased to 40% of total assets while cash & investments rose to 45%. The inmates have rallied and taken over the asylum. Credit losses have down-trended and are not a drag on net income. Therefore, core banking performance is actually good but an aside to the glamour of being a world player in the markets.

Return on assets dipped from a meager +0.06% last quarter to - (drum roll, please) - to zero, yep, 0.00%. The saving grace for Bank of America is an adequate platform from which to operate. That is, capital is strong at 10.66% of total assets.

Bank of America Income Statement Q1 2012 Bank of America reported net revenues of $22.28 billion, net income of $653 million, and earnings per share of $0.03. From the prior quarter Q4 2011, these were -10%, -67%, and -80%, respectively. From the prior year Q1 2011, these were -17%, -68%, and -82%, respectively. The operating and net margins dipped QoQ and YoY to 3.23% and 2.93%, respectively. The Provision for Credit Losses of $2.42 billion is at a multi-year low. The operating expense ratio of 71.17% is historically high.

Bank of America Balance Sheet Q1 2012 Total assets increased to $2.18 trillion. Bank of America continues below the total assets of $2.32 trillion reported by JPMorgan Chase for the current quarter. The capital ratio was flat at 10.66%, which is strong. Return on assets dipped from +0.06% to 0.00%. Net Loans are a decreasing share of the asset mix.

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