Wednesday, October 24, 2012

Bank of America Earnings Review: Ongoing Volatility

Bank of America reported QE September 2012 financial results on October 17

Bank of America, the World's Most Unstable Bank, is inexplicable at this point in their corporate life cycle. I continue to have the vague, hopeful feeling that BAC has moved on from the very worst of their troubles. However, doom is most likely alive and well in the background and may be in the form of junk mortgage repurchases and retribution for various morally reprehensible deeds performed. For now, a sigh of relief is in order as we wait and see what financial catastrophe the next quarter might bring.

CEO Brian Moynihan continues cleaning up the carnage from the biggest debacle in American banking history. Moynihan announced last quarter Project New BAC: a multi-year, multi-billion dollar cost cutting plan which will include a workforce reduction of tens of thousands. The past "banking" model was broken (actually it shattered and collapsed into rubble).

The foremost problem is contingent liabilities, ongoing legacy losses, that surface and the lawsuits and government regulatory actions that result. After reserving billions of dollars, the worst of the incredible and extraordinary losses appear accounted for. Only time and fate will tell.

Therefore financial performance is and will be volatile. Risk management consists of all hands on deck searching the skies for incoming realized losses and hoping they are adequately reserved for. Financial position has stabilized and capital is actually strong.

At QE 9-30-12, I have rated Bank of America a "B-" on a scale of A+ to G-. This is a downgrade from "B" at the prior QE 6-30-12. The median rating is "D" and the average rating at QE 6-30-12 was "C". Financial position is weighted more than financial performance. The QE 6-30-12 bank ratings review is here.

"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; loans to our commercial clients rose for the seventh consecutive quarter; and our corporate clients made us the second-ranked global investment banking firm," said Brian Moynihan, chief executive officer. "Our strategy is taking hold even as we work through a challenging economy and continue to clean up legacy issues."

"Our focus on strengthening the balance sheet continued this quarter," said Chief Financial Officer Bruce Thompson. "We ended the quarter with record Tier 1 common capital ratio of 11.41 percent and an estimated Basel 3 Tier 1 common capital ratio of 8.97 percent, up from 7.95 percent as of the second quarter of 20121. With these gains, we have turned our attention to driving core earnings."


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