Bank of America Posts Adjusted Loss Excluding "Benefits" From Spread Blow Up

Tyler Durden's picture

In yet another episode of accounting gimmickry Groundhog Dayness, Bank of America reported a massively wonderful EPS number of $0.56, which obviously is more than 100% better than the expectation of $0.21.... Until one actually reads the press releases and finds that this number is nowhere near comparable to an apples to apples comparison. To wit: the reported net income number was $6.2 billion, which includes, "among other things, $4.5 billion (pretax) in positive fair value adjustments on structured liabilities, a pretax gain of $3.6 billion from the sale of shares of China Construction Bank (CCB), $1.7 billion pretax gain in trading Debit Valuation Adjustments (DVA), and a pretax loss of $2.2 billion related to private equity and strategic investments, excluding CCB. The fair value adjustment on structured liabilities reflects the widening of the company’s credit spreads and does not impact regulatory capital ratios." So netting out the CCB gain and the strategic investment loss leaves us looking at the two items entirely affected by the blow up in the company itself manifested by its soaring spreads: the $4.5 billion in structured liabilities adjustment and the DVA which add to $6.2 billion, which is.... what the company reported as its EPS! In other words, Bank of America had $0.00 EPS excluding for the accounting BS that is provisioning for buying "CDS on yourself." And since both of these adjustments flow through the P&L, the reported revenue of $28.45 billion (much better than the expected $25.92 billion) had to be adjusted $6.2 billion lower, and confirms that absent this most blatant accounting gimmick, the revenue was a huge miss. Yet despite a plunge in the company's NIM, a $1.7 billion reserve release, and a substantial plunge in BAC's provisioning for Rep & Warranties from $14 billion in Q2 to $0.3 billion in Q3, something which will again haunt BAC, Bank of America increased its staffing from 40.4 thousand to $42.1 thousand sequentially. Alas, that trends will not persist.

From the earnings release:

  • Headwinds of global economies, housing, interest rates and Eurozone debt crisis persist
    • Sales and trading results reflect challenging market environment
  • Total deposits increased
  • Loan growth remains muted

Selected numbers:

The lifeblood of the company - Net Interest Margin - goes from upper left to lower right:

  • Net interest income declined $754MM and net interest yield declined 18bps to 2.32%
    – Negative impacts in 3Q11 vs. 2Q11 include:
  • Faster amortization of purchase premiums due to faster modeled prepayments ($0.5B)
  • Negative asset hedge ineffectiveness incurred as part of our overall interest rate risk management activities ($0.6B in 3Q11 vs. $0.2B in 2Q11)
  • Positive contributions to NII from lower debt balances and rates paid on deposits more than offset reductions from declines in consumer balances and yields
    – Our overall interest rate risk position continues to be asset sensitive

Remember Sales and Trading? Well, forget it. Complete collapse across the board.

  • Sales and trading revenue of $2.8B declined $1.0B from 2Q11 and was down $1.7B from 3Q10
    • Results include DVA gains of $1.7B in 3Q11 compared to gains of $121MM in 2Q11 and a loss of $34MM in 3Q10. 12% of the 3Q11 DVA was  incurred in the equity business
  • 3Q11 impacted by adverse market conditions across fixed income products with extreme volatility in credit markets
  • Risk aversion has slowed customer activity as reflected in the reduction in VaR [from 229.2 to 163.7]

R&P and Warranty provisioning plummets:

Full presentation: