Bank Of America Earnings Plagued By Legacy Countrywide Woes Offset By $900 Million In Loan Loss Reserve Releases
As disclosed 10 days ago in its agreement with Fannie, Bank of America already warned that it would see a $2.7 billion pre-tax hit to earnings resulting from just one GSE reps and warrants settlement. Sure enough, this was the biggest one time adjustment to the company's earnings which came out at $700 million on a pre-adjustment basis, or some $0.03. Excluding all the various incurred "charges", the bank reported $0.29 in earnings. Of course, the assumption is that the bulk of the charges highlighted below are "one time" - yet, since most of them relate to the ongoing reps and warrants litigation, it is rather safe to put them in the recurring cost of business as the total amount of outstanding claims on R&W warrant cases has soared to a record $28.3 billion, compared to just $12.6 billion a year ago. Netting out the $13.5 billion in GSE claims which are now settled there are still some $125 billion in private and monoline claims which will continue to be a drain on BAC cash and EPS for years to come.
The full breakdown of Q4 "earnings", including the rather odd $2.4 billion tax benefit, and all the charges is shown below. Oddly enough, a year ago it paid some $441 million in taxes.
In brief: $10.56 billion in net interest income, better than the $10.24 billion estimate, driven by the arbitrate $900 million in loan loss reserve releases for the quarter (see below). The far less adjustable non-interest income was just $8.34 billion, far below the estimated $11.7 billion. Of course, BofA's argument is that this is due to one-time charges. Yet are these truly one time charges? A quick look at the outstanding Reps and Warrants claims shows there is much more legacy Countrywide pain to come for the bank:
In one years total claims have increased from $12.6 billion to $28.3 billion. Of this the GSE claims are now settled, which means only some $5-10 billion to settle the outstanding Private and Monoline R&W claims. In other words, it is safe to assume that the same kinds of "one-time" charges will be seen for years to come.
Net interest margin declined from a year ago, from 2.45% to 2.35%, although it rose by a tiny 3 bps from last quarter. This resulted in some $10.6 billion in Net Interest Income in the quarter, or well over half of the total revenue of $18.9 billion reported in Q4.
The $10.6 billion in Net Interest Income, which was "better than estimates" of $10.24 billion, was offset by some $2.2 billion provision for credit losses. Of course, this being Bank of America, there was a lot of Loan Loss Reserve Releases. Sure enough, as the chart below shows of the $700 million in unadjusted Net Income, some $900 million, or more than all of it, came from everyone's accounting gimmick. Absent the release, the firm would have reported a negative pre-adjustment Net Income number.
The $900 million reserve reduction was accompanied by some $3.1 billion in charge offs, of which $2.9 billion in consumer and $251 million in commercial. Of the consumer charge offs, $714MM was in resi mortgage, $767 million in home equity and $978 million in credit cards. The total was $2.2 billion provision for credit losses.
The loan book did not improve much if at all, with some $15.3 billion in residential NPAs. This was driven by a reduction in the 180 day past dues from $10.1 billion to $9.2 billion, offset by an increase in the < 180 days from $5.7 billion to $6.1 billion. Home Equity NPAs was unchanged at $4.3 billion.
Then we look at sales and trading revenue, that other bastion of profitability of the New Normal bank hedge funds, where we find that it declined by $0.7 billion from Q3 to $2.5 billion ($1.8 billion in FICC and $0.7 billion in Equity Income), although rising from a year ago. A far cry from the blow out trading numbers reported by Goldman. What is odd, is that while the Goldman VaR plunged, BAC's soared:
Finally, there were quite a few pink slips at the bank in the quarter, with some 228.5K FTEs at the end of Q4, down from 230.9K last quarter, and 242.3K a year ago.
In short: yet another quarter marked by "one-time" charges which will likely never go away, and ongoing deterioration in business fundamentals offset by loan loss reserve releases.
Full presentation below
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