On the surface, the latest Q3 bank numbers to come out of Bank of America today, were not quite as bad as those previously reported by the other TBTFs, namely JPM, Wells and Citi. At a (massively adjuste4d) EPS of $0.20, this was just 1 cent below the expected $0.21, even as net revenue of $21.74 billion missed expectations of $21.95 billion. So far so good. At least so good until one realizes that of the $5.1 billion in pretax income, some 1.4 billion, or over a quarter, was from the usual accounting magic well of gimmicks: loan loss reserve releases! In fact, the $1.391 billion in reserve reduction driven by $1.7 billion in charge offs offset by a tiny $0.3 billion in provisions, was the highest reserve release in the past year, only lower than last Q3's $2.3 billion, when the bank - just like today - was in desperate need of any source of fake earnings. Why? Because the bank's loan origination group, just like all other banks', cratered, and saw non-interest income in its real estate services division implode by $1.5 billion to just $844 million. So much for whatever housing recovery the rose-colored glasses ones had envisioned...
This is how the bank, in a brief note in its earnings, observed this ongoing aberration:
The provision for credit losses was $296 million in the third quarter of 2013, down $915 million from the second quarter of 2013 and $1.5 billion less than the third quarter of 2012. The provision for credit losses was lower than net charge-offs, resulting in a $1.4 billion reduction in the allowance for credit losses in the third quarter of 2013. This compares to a $900 million reduction in the allowance in second quarter of 2013, and a $2.3 billion reduction in the third quarter of 2012.
And that was it: 27% of pretax net income getting 4 lines of explanation. Certainly some sellside analyst will inquire into this?
Where the magic "earnings" came from: somehow in a quarter in which everyone else was puking credit losses, Bank of America was wearing so many shades, it barely saw a reason to take any credit loss provisions. Brilliant.
Looking at actual organic lines of business, it is no surprise that just like all the other banks, Bank of America was pummeled in the key, FICC, line item.
But the real pain, as expected, was in the mortgage banking division, where as is widely known, business ground to a halt in Q3. Sure enough, noninterest income in the Consumer Real Estate Services segment imploded by a whopping $1.5 billion from a year ago to only $844 million
This is what BAC had to say about it.
- Net loss increased slightly from 2Q13, as LAS cost savings and provision improvement were more than offset by lower mortgage banking income and increased litigation costs
- Total Corporation first-lien retail mortgage originations were $22.6B, down 11% from 2Q13
- Mortgage pipeline at the end of 3Q13 was down 59% from 2Q13
- Core production revenue declined $395MM from 2Q13, due to a 23% reduction in rate lock volumes and lower sale margins
- Servicing income declined $116MM from 2Q13 as the size of the servicing portfolio continued to decline
- Total staffing declined 11% from 2Q13, due primarily to continued reductions in LAS, as well as actions taken in sales and fulfillment as refinance demand slowed
But not even BAC is brazen enough to keep pumping the bottom line with fake earnings without cutting at least some fat. Sure enough, On the expense side, the firm's recurring expenses (ex LAS and litigation) dropped from $13.2 billion to $13.1 billion mostly due to a 9.2K (3.6%) reduction in FTEs to 247,943, the lowest in years as the bank took the axe to its mortgage origination employees
On the balance sheet, total deposits increased by $30 billion from $1080.8 billion to $1,110.1 billion: a record high, not nearly offset by the mere $10 billion increase in loans from $914.2 billion to $924 billion, as like JPM, BAC uses the excess cash to buy risk directly.
The key loan quality indicators of note is that LTVs for both average and 90% loans continues to drop, and hit 71% and 21% respectively. In the % of loans below 620 FICO, BAC reported a total of 12% in notional.
And so on: accounting gimmicks, deteriorating organic business lines, reduction of key employees as the consumer refuses to originate loans, sticking head in sand and reducing quality of loans made even as deposits soar far ahead thanks to QE, allowing the bank to become ever more into a prop trading desk. All the makings of an inevitable disaster.
Full presentation below