Bank of America Corp (NYSE:BAC) reported 1Q13 EPS of $0.20 vs. consensus of $0.22. Higher expenses (largely litigation driven) and weaker fee income (largely FICC-driven) were only partially offset by higher net interest income and better credit. While core expenses are heading in the right direction, core revenue seems to be falling faster (core pre-provision profit down 10% YoY) and it is unclear when non-core expenses will disappear from the run-rate. While there are several bright spots (Basel III capital of 9.4%, 11% growth in mortgage banking originations, share gains in IBD/equities), core EPS of about $0.26 in the strongest seasonal quarter of the year will likely leave questions around the path to $1.30 of consensus EPS for 2014.
Analysis
Bank of America Corp (NYSE:BAC) Higher expenses drive miss
Expenses came in at $18.2bn vs consensus of $17.2bn. Higher litigation expenses ($833mn) explains part of the delta, but “core” expenses also remain stubbornly high. Management indicated it should be 75% of the way through its New Bank of America Corp (NYSE:BAC) cost saves by 4Q13.
Mixed bag in capital markets, as investment banking and equity trading fees were strong, offset by weaker FICC. FICC trading was down 20% YoY, underperforming peers as many expect a de-risked balance sheet prevented Bank of America Corp (NYSE:BAC) from recognizing some of the positive asset marks seen by peers.
FICC
FICC trading disappointing—down 20% yoy ex DVA. This compares to peers down 5-10%. Bank of America Corp (NYSE:BAC) pointed to a large 1Q12 gain in mortgage products, less spread tightening and less favorable markets in commodities. Some peers have pointed to better mortgage this qtr. 2) Traditional banking fees (service charges, card) were weaker than expected yoy. This is consistent with what we’re seeing elsewhere. Mortgage was in line. 3) Ex litigation and stock grant costs ($0.9b), expenses were $16.4b or stable vs. the 4Q level despite a $0.5b decline in legacy costs and continued savings from new BAC. Some of the increase likely reflects higher compensation related to higher markets revenue.
Net interest income was strong, ($10.9bn), although driven by: (1) positive premium amortization, which will not persist, and (2) lower funding costs, which are likely to be sustainable.
NCO dollars 13% lower than expected and down 19% q/q. NCO ratio was 1.14%. Reserve bleed of $800m or 5c (comm’l NPLs down 15%, consumer down 1%). EOP Loans balances declined by $1.5b or 0.2% q/q.
Bank of America Corp (NYSE:BAC)’s Basel III capital continued to build, ending at 9.42%. Unlike previous capital builds, this quarter’s increase was driven by higher Tier 1 common from retained earnings and lower deductions, as RWA was flat.
Basel 1 Common Tier 1 of 10.58% down 48 bp q/q due to implementation of market risk rules with B1 RWAs up $94b or 7.8% q/q.
Special/lumpy items
Gains: $312m net MSR gains (from sales and hedges), a $300m boost to net interest income from premium amortization adjustments (higher rates in 1Q13) and $79m of net securities gains. There was also $804m of loan loss reserve release. Hits: $881m of litigation costs, $250m mortgage rep/warranty, and $145m DVA/FVO. There were also 1Q stock grant costs of about $900m. The tax rate was 28% vs. expectations of 23%.
Bank of America Corp (NYSE:BAC) also reported an impressive $563m private equity gain. On the conference call management stated
As we go forward, the runoff of the structured credit portfolio that we have, we would expect to accelerate as we go into ’14, ’15 and ’16. And that As we go forward, the runoff of the structured credit portfolio that we have, we would expect to accelerate as we go into ’14, ’15 and ’16. And that will obviously be gone by the end of ’17. So that is an opportunity and then the third thing I would say is that we continue to work through, and you can see we made progress on the private equity portfolio this quarter and we will continue to wrap that up.’
