BofA Reports $2.5 BN Net Income On $1.9 BN Reserve Release, Reps And Warranties Claims Soar

There were several numbers one should focus on today's Bank of America earnings release. They were not the Net Income EPS ($0.19 which beat estimates of $0.15), the Income before income taxes of $3.4 billion, nor Revenue net of interest expense ($21.968 which missed expectations of $22.71 billion). Here are the numbers that did matter: Loan Loss Reserve Release $1.9b billion, or 56% of pretax net income, Sales And Trading Revenue exluding DVA plunged by $1.9 billion from Q1 to $3.3 billion (and by $263 million from a year ago), and most importantly, counterparty claims by coutnerparties for Reps and Warranties purposes (remember those? the realization of their size caused the stock to plummet last August) soared from $16.1 billion to $22.7 billion sequentially: the highest it has ever been, even as the company only took a $395 million provision against losses, and the ending Rep and Warranties balance was $16 billion (driven by nearly a doubling in Private repurchase request claims from $4.9 billion to $8.6 billion!), or well below the potential outstanding claims. BAC is now reserve deficient by about $6.7 billion! Considering the company's settlement with Syncora yesterday, and imminent settlement with MBIA this may be a tiny problem.

BofA Sales and Trading revenues implode as equity trading dries out, but a big collapse sequentially in the far more profitable Fixed Income.

 

Reserve release, at 56% of pretax Net Income, says why Net Income is completely meaningless.

 

 

And how BofA is once again very much underreserved: Why did private claims surge? "Increases in private-label new claims are primarily related to repurchase requests received from trustees on private-label securitization transactions not included in the BNY Mellon settlement, including claims related to third-party sponsored securitizations that include monoline insurance." The bank is once again largely underreserved.

 

Full Q2 earnings presentation: