Bank of America Earnings: Cutting Through The Noise

Bank of America reported results earlier, which were somewhat amusing: reported earnings were $653 million or $0.03 per share. Yet the number that the market is fascinated by is the one arising from "negative valuation adjustments" of $4.8 billion, which included $1.5 billion in DVA "resulting from the narrowing of the company's credit spread", and resulted in a $0.28 per share addition. This is the same number that we were told to ignore when it did not help the bottom line. We will be told to ignore it again next quarter when spreads once again balloon, but for now it leads the market to see a $0.31 adjusted EPS number. In other words, one time items are to be ignored when negative, and praised when providing a "one-time benefit." These also included $0.8 billion in litigation expenses, which are also supposed to be excluded, even though the bank has now been sued by virtually everyone due to its Countrywide legacy portfolio. Yet all of this is accountant fudge heaven: there are only three things that matter. 1) The approaching refi cliff, in terms of tens of billions in maturities, including FDIC-funded TLGP, which are as follows: "$34B of parent company maturities in 2Q12 including the remaining $24B related to the Temporary Liquidity Guarantee Program" 2) sliding sales and trading revenues which dropped from Q1 by $546 million from a year ago to $2.844 billion in FICC, and by $332 million in Equity income to $907 million; and finally 3) and reserve release gimmicks: specifically BAC took a $1.6 billion reserve release even as the net chargeoff percentage increased. Specifically look at the first chart below showing the $1.8 billion surge surge in junior-lien Non-Performing Home Equity Loans due to regulations finally catching up to reality. Also, the bank charged off more in Reps and Warranties than it reserved, even as everyone is now suing the bank for precisely this issue. And this is the environment in which the firm books profits from reserve releases?

First the surge in NPAs (non-performing loans). The huge spike in home equity is described as follows: "During 1Q12, the bank regulatory agencies jointly issued interagency supervisory guidance on nonaccrual policies for junior-lien consumer real estate loans. In accordance with this new guidance, beginning in 1Q12, we classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. As a result of this change, we reclassified $1.85B of performing home equity loans to nonperforming." Bottom line - the bank finally has to adopt to reality.

Robosigning may be dead, but the bank's troubles with reps and warranties litigation is only starting. And yet, BAC made just a $282 million provision in this category as it charged-off $300 million. Same accounting gimmickry, all the time. Note the surge in repurchase demands from GSEs and Private Labors, sending the total to a record $16.1 billion.

Keeping the truly big picture in mind: $730 billion in outstanding balance in 2004-2008 originations, have paid $13 billion, and have just $16 billion in reserves established. "Estimated Range of Possible Loss (RPL) above accruals up to $5B for non-GSE exposures at March 31, 2012". Translated: the bank is once again woefully underreserved, because as the chart above shows, BAC mortgage repurchase claims from GSEs increased by $1.8 billion in just one quarter (and by $1.6 billion from private labels). Recall this post from October 2010: it is still 100% valid and relevant.

Income statement summary, showing the $6.1 billion in "selected" addbacks.

Sales and Trading results excluding fudges:

Full slidedeck: