Bank of America's $10 Billion In 2014 Legal Charges Mask Ugly Trends, Net Interest Margin Drops To Lowest On Record

Tyler Durden's picture

If last quarter Bank of America was forced to report a stunning loss, its first in years, as a result of a $6 billion "one-time, non-recurring" litigation charge which clearly was added back to non-GAAP earnings because it could not possibly become a part of ongoing earnings, in Q2 BofA just reported another whopper of a litigation charge, this time totaling $4 billion. And naturally, BofA was helpful in adding it back to the actual EPS print of $0.19, which was to be expected: the charge itself was $0.22 or more than the actual amount of money earned by the bank in the quarter, resulting in a pro-forma EPS of $0.41 beating Wall Street expectations of $0.29.

But are BofA's litigation charges truly "one-time"? Look at the chart below and decide for yourselves: in 2014 alone BofA has already charged and added back some $10 billion in litigation expenses. But sure, go ahead and "add them back."

Sadly, without this fluff addbacks which is now as much as part of
BofA's as any other item, the bank's earnings declined by 43% from $4.01
billion to $2.29 billion.

And then there were the reserve reduction addbacks of course: in Q2 they amounted to $662 million, well above the $379 in vapor "earnings" posted last quarter:

But what is worse is that Bank of America reported Net Interest Income of $10.23 billion, below the expected $10.33 billion, and an amount that had nothing to do with legal fees, "one-time" charges and reserve releases, continues to decline.

Why was this number so weak? Because not only does BofA's balance sheet continue to collapse, with its mortgage services portfolio continuing to collapse from $780 billion to just $760 billion, down from $986 billion a year ago but because BofA just reported the lowest NIM, or Net Interest Yield as it likes to call it, in history at 2.22%. So much for that NIM surge that everyone has been expecting for years.

And speaking of BofA's balance shee, aft erht Q1 surge in provision for credit losses, in Q2 things were a little bit better, but nor much: the total amount dropped from $1 billion to $411 million "driven by improved credit quality." It was unclear just how much of an improvement considering, this was the second highest amount since Q3.

Going down the balance sheet, no surprise that like all the other major banks, BofA too was skwered when it comes to mortgages.

And while management tried to spin the $1.9 billion drop in earnings Y/Y in real estate, here is the end result: "Total staffing declined 14% from 1Q14, due primarily to continued reductions in LAS, as well as actions taken in sales and fulfillment as refinance demand slowed."

Elsewhere, there was no joy in tradeville either, as like all the other banks, BofA also succumbed to the ongoing contraction in trading across the board:

BofA's commentary:

  • Excluding net DVA 3, 4, sales and trading revenue of $3.4B was relatively flat vs. 2Q13 and decreased $697MM, or 17%, vs. 1Q14
    • FICC revenue increased $117MM, or 5%, vs. 2Q13, driven by improved conditions in mortgages and munis, partially offset by a decline in FX and commodities
  • 2Q14 revenues decreased $576MM, or 20%, vs. 1Q14, following a seasonally stronger first quarter
    • Equities revenue decreased $162MM, or 14%, vs. 2Q13 and $121MM, or 11%, vs. 1Q14 as low volatility depressed secondary market volumes and client activity

End of the day, however BofA may try to spin the results, the trendline is clear, and it is best represented by the bank's headcount.

Full report: