Bank Of America Beats EPS Estimates, Misses Net Of One Time Items, Reports Could Be Underaccrued By Up To $5 Billion

The just reported Bank of America top and bottom line numbers were better than expected, coming in at $24.89 billion compared to estimates of $24.5 billion, and EPS of $0.18 vs $0.15. The actual Net Income number number was $2.0 billion and $2.7 billion pre tax. So far so good. But a quick skim through the presentation (attached below), indicates that the $0.18 number may be grossly inflated. Because when one excludes the various selected one time items highlighted in the quarter, which are as follows: Gain on sale of CCB shares-$2.9; Gains on exchanges of trust preferred securities - $1.2; Gains on sales of debt securities - $1.2; Representations and warranties provision - ($0.3); DVA on trading liabilities- ($0.5); Goodwill impairment - ($0.6); Fair value adjustment on structured liabilities - ($0.8); Mortgage-related litigation expense ($1.5), all of which it appears are part of the pretax number, the final EPS comes in at a much less impressive $1.3 billion pre tax, which at the company's indicated tax rate, would have been $1.0 billion after tax, or $0.10 EPS, a notable miss. Which likely means that the Revenue "beat" on an apples to apples basis would also have to be pro forma'ing a bunch of items, and likely would be a miss. But for that we will need to go through the several hundred page 10-Q, something which management is hoping the machines which will send its stock much higher in the pre-market session, will never do. Another notable item is that for the first time in a long time, the company's average deposit balances declined by 1.2% in Q4 from Q3, from $422.3 billion to $417.1 billion (as the rate on deposits fell from 0.25% to 0.23%). Not a good trend, but certainly to be expected following the snafu with the company's electronic banking website last quarter. Also troubling is that in Q4, the company's Home Equity Non-Performing Assets increase for the first time in years, from $2.4 billion to $2.5 billion: it seems the improvement in housing has plateaued. Finally, and most troubling, is that BAC reported that "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011." The reason: a surge in New Claims in Q4 "primarily related to repurchase requests received from trustees on private-label securitization transactions not included in the BNY Mellon settlement." Which means another $5 billion out of Net Income due to underreserving. Because how much did BAC provision for Reps and Warranties in Q4? Why a 'whopping' $263 million. And how much is the potential full notional value of underreserved contingent liabilities? Why $755 billion only.

Summarized as follows:

On the decline in the deposit base:

And why Reps and Warranties will soon be a major issue all over again, just like we predicted back in October 2010:

Spot the $755 billion in unreserved contingent liabilities.

Bloomberg summarizes the results as follows:

  • Bank of America 4Q oper EPS 15c with items, may not compare to 13c est.; rev. $25.15b may not compare to $25.50b est.
  • Global banking and markets net rev. $3.72b (inc. $474m DVA losses) vs $5.22b Q/q
  • Sales trading rev. $1.4b vs $2.8b Q/q
  • FICC rev ex-DVA $1.2b vs $314m Q/q, equity $660m vs $757m Q/q
  • I-banking fees $1.1b vs. $1.1b Q/q
  • Consumer real estate svcs. net rev. $3.28b, net loss ($1.5b) vs $2.82b/($1.14b) Q/q
  • Global card svcs. net rev. $4.1b vs $4.51b Q/q
  • Global commercial banking $2.56b vs. $2.53b Q/q
  • Wealth inv. mgmt. rev. $4.16b vs. $4.23b Q/q
  • 4Q provisions $2.93b vs. $3.41b Q/q, or 3.68% of loans vs 3.81% Q/q
  • Tang. BV-shr $12.95 vs $13.22 Q/q

Full earnings spin report here, and the presentation is below: