Bank of America Corp (NYSE:BAC) reported GAAP EPS of $0.00, which we estimate as $0.25, excluding all non-core items. The biggest positive surprise was a 100bp increase in B3 T1C to 8.97%, making BAC the best-capitalized money center bank, according to Goldman Sachs Inc.(NYSE:GS). B3 capital was strong at 8.97%. The increase was driven by both lower deductions and lower RWA from reduced risk weightings.
Bank of America

BETTER BASEL III CAPITAL TRENDS. Basel I T1C ratio up 17 bps to 11.4%, B3 T1C ratio 9.0%, up 102 bps from Q2 estimate on higher OCI and lower MSR valuations (21 bps combined) and lower RWA to $1.5T, due to portfolio mix changes and improved credit quality.

Core NII and NIM both modestly better, but loan growth is still sluggish — Core NII of $10.5 bil (ex ~$300 mil of prem amort & hedge ineffectiveness) was better than estimates of $10.4 bil, with core NIM at 2.39% vs estimates of 2.35%, but appear weaker on a reported basis (NII $10.2 bil; NIM 2.32%). Total EOP loans were flattish at $893 bil, with commercial growth of 4% q/q offset by consumer run-off -2% q/q.

Positives in the Quarter

1) 8.97% est Basel 3 T1C ratio (+102bps q/q, including 21bp related to changes in OCI and lower MSR valuation); 2) NII improved $400mm q/q as the NIM improved 11 bps (7bps on an adjusted basis) helped by reduced LT debt and less hedge ineffectiveness; 3) Solid liquidity: Time to required funding at 35 months; 4) Headcount declined modestly in Legacy Asset Servicing and 60+ delinquent loans declined 12% q/q; 5) Trading revs held up OK: -3% q/q ex DVA, +149% y/y; 5) 20% pretax margin and $5.7bn LT flows in GWIM; 6) Credit still improving (NCOs -$417mm q/q ex the change in reg. guidance on Chapter 7 bankruptcy treatment, NPAs -5.7% q/q); 7) Modest net loan growth q/q with comm’l loans +4.3% q/q.

Negatives in the Quarter

1) EPS drag of $0.28 from previously announced items ($1.9bn DVA, $1.6bn litigation expense, $800mm charge related to change in UK tax rate; 2) Total revenues ex DVA were flattish q/q and y/y; 3) Rep & warranty claims +12% q/q (both GSEs and private label) and management bumped potential losses above accruals to $6bn from $5bn; 4) Noninterest expense was flattish q/q ex the $600mm increase in litigation expense, so more work to do; 5) Average Card loans -2% q/q and -11% y/y ($600mm q/q decline ex run-off); 6) Core earnings still a concern as 3Q12 included $2.3bn reserve release (est. $0.14 EPS boost).

Shares of Bank of America Corp (NYSE:BAC) are up 1.2% at the time of this writing.

Disclosure: Long BAC Calls