Bank Of America Gimmicks Continue - Chargeoffs Soar To Highest In A Year, As Loan Loss Release Surges

When one combs through the usual hodge podge of purposefully distracting headline bullets in Bank of America's quarterly release one as usual ends up with a sorry picture. Here are the key numbers: Noninterest income for the firm, traditionally about half of total revenues in addition to Net Interest Income, has continued to decline, and slid fo $10.5 billion, down from $12.4 billion in Q2 and down from $18.0 billion in Q3 2011. The other side: Total Interest Income (before expenses) also has continued to decline, and dropped to $13.976 billion from $13.992 billion a quarter ago, and down from $15.853 billion a year earlier. These numbers are hard to fudge. The number that is very easy to fudge is the Net Income (and per share) line, which was reported at $340 MM or $0.00 in diluted earnings per share after dividends. What helped substantially here is the following: while the firm booked a provision for credit losses of just $1.774 bilion, in line with Q2 and half of the $3.4 billion in Q3, 2011, what more than offset this was the surge in reserve reduction which soared to the highest in years at $2.348 billion, up from $1.853 billion in Q2 and way up from the $1.679 billion in Q3 2011. What is even more paradoxical is that despite what Moynihan is saying about an improvement in the housing market, the bank's total chargeoffs rose to the highest in a year, at $4.122 billion, up from $3.626 billion in Q2, and the highest since Q4 2011. The result is that the Net charge off ratio also spiked to the highest in a year, at 1.86%.

As usual Bank of America continues to see a surge in Rep and Warranty claims, which rose another ~10% in the quarter from $22.7 billion to $25.5 billion in Q3, up 150% from the $10 billion in Q3 2011. But this, just like the consequences of QE, is something Bank of America doesn't have to worry about: after all it will be drown in litigation at least until such time as the rickety house of cards finally comes crashing down. In fact, perhaps the best indicator of where the bank sees itself heading is its headcount number, which dropped to the lowest in years: In Q3 total Bank of America employees were 272,594, down from 275,460 in Q2 and from 288,739 a year ago.

Below is BofA's paradoxically rising reserve release even as charge offs soar:

Other observations: total long-term debt declined from $302 billion to $287 billion. Curious who is deleveraging? Hint - it is not the US consumer (he is merely defaulting on insurmountable debt as we wrote two days ago). It is the banks, which are quietly doing all they can to reduce their balance sheets and grow into a far lower income stream without alerting the market.

Luckily, for BofA, the lifeblood - deposits - rose from $1.035 trillion to $1.063 trillion sequentially. This makes sense: instead of putting their cash into the stock market, Americans are increasingly adding to risk (and interest) free demand deposits. Return of capital. Not on.

The Reps and Warranties picture is well-known to those who follow it: the bank is woefully underreserved even as new claims keep coming in courtesy of the worst purchase of all time - Countrywide Financial.

Curiously, BofA has something quite specific to say about the Walnut "Baupost" Place:

In addition to the claims in these tables, we have received repurchase demands from private-label securitization investors and a master servicer where we believe the claimant has not satisfied the contractual thresholds to direct the securitization trustee to take action and/or that these demands are otherwise procedurally or substantively invalid. The outstanding amounts of these demands were $1.7B as of September 30, 2012, $3.1B as of both June 30, 2012 and March 31, 2012 and $1.7B as of both December 31, 2011 and September 30, 2011. The demands outstanding declined as $1.4B of the demands were resolved through the dismissal of the Walnut Place lawsuit in July 2012. At September 30, 2012, approximately $300MM related to the BNY Mellon Settlement. We do not believe that the $1.7B in demands outstanding at September 30, 2012 are valid repurchase claims, and therefore it is not possible to predict the resolution with respect to such demands.

Good luck BofA.

Back to the core business, it will come as no surprise that Sales and Trading declined across the board in a quarter in which everyone posted trading drops:

Finally, and just like all the other banks, BofA is now aggressively moving back into Europe, and has seen its PIIGS exposure rise by nearly 20% sequentially, primarily through a $2 billion increase in its Italy exposure. Shades of MF Global anyone?

Bottom line, things are progressively getting worse, but nobody is allowed to mention this, as the financial house of cards, built on hope, prayer, and attempts to kindle housing bubble 2.0, would promptly tumble.

Full BofA presentation below: