Bank Of America Beats On Lower Tax Rate, Higher Loss Reserve Release As Mortgage Originations Plunge 50%

Tyler Durden's picture

If yesterday it was JPM's turn to shock and awe everyone with its adoption of FVA and impress with its non-GAAP revenues, today it is the turn of Bank of America to confuse everyone with its traditionally indecipherable earnings release. So here is the punchline. BAC reported revenues of $21.7 billion which beat expectations of $21.14 billion, although more importantly EPS of $0.29 vs expectations of $0.27. So how did BAC generate the better than expected top and bottom line? Simple - the top line beat was driven by the bank's return to an aggressive extraction of non-income income from loan-loss reserve releases, which in the current quarter rose to $1.246 billion, up from $900 million a year ago. Considering the Bank had non-GAAP pretax income of $3.8 billion, this amount to just about a third of its earnings.

 

This was driven by the bank charging offsome $1.6 billion offset by just $0.3 billion in provisions.

This is what the bank had to say about its loan loss releases:

The provision for credit losses declined $1.9 billion from the fourth quarter of 2012 to $336 million, driven by improved credit quality. Net charge-offs declined significantly to $1.6 billion in the fourth quarter of 2013 from $3.1 billion in the fourth quarter of 2012, with the net charge-off ratio falling to 0.68 percent in the fourth quarter of 2013 from 1.40 percent in the year-ago quarter. The provision for credit losses in the fourth quarter of 2013 included a $1.2 billion reduction in the allowance for credit losses, compared to a $900 million reduction in the allowance in the fourth quarter of 2012.

Additionally, the company paid only $406 million in reported taxes on pretax income of $3.845 billion, or a 10.6% effective tax rate. How does this compare to the historic average of 25%? Obviously, it's much lower. In fact, if BAC had used its historic tax rate of 25%, the EPS "beat" of $0.29 would have become a $0.25 miss. But all is fair in sellside analyst love and making up non-GAAP numbers.

And finally, let's not forget the elephant in the room: litigation reserves: at $2.3 billion this was the biggest one-time item in recent years.

Ok, so BAC would have missed wildly if it hadn't dug into its bag of usual accounting tricks. But what about the organic business? Well, since banks traditionally make money not as hedge funds but as lenders, here is the bottom line: in Q4, just like with Wells, mortgage origination crumbled by a whopping 49%! This led to a $1.1 billion loss in the CRES group, a drop of $2.6 billion compared to a year ago.

As for how the bank's trading operation fare this quarter, the answer : flat to down.

Here is what BAC had to say:

Net income of $0.2B

  • Excluding DVA and U.K. tax charge, net income of $0.3B declined from both comparative periods as revenue improvement was offset by litigation expense

Excluding DVA, sales and trading revenue of $3.0B increased $483MM, or 19%, from 4Q12 and was consistent with 3Q13

  • FICC revenue increased $292MM, or 16%, from 4Q12 and $47MM, or 2%, from 3Q13 as stronger results in credit and mortgage products offset weakness in rates and commodities
  • Equities revenue increased $191MM, or 27%, from 4Q12 due to market share gains, higher market volumes and increased client financing balances, but declined 7% from strong 3Q13 results

Bottom line: virtually no change from a year ago.

Also of note. VaR declined from 100 a year ago to just 74.

Finally, as for how the bank sees its future, well: here are the bank's employees at different points in time. The trend is clear.

Full earnings presentation below: