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Following a decent start to the earnings season by a couple of giants, Bank of America Corporation (BAC - Analyst Report) maintained the stride with a positive earnings surprise of 7.4% for the concluding quarter of 2013. The banking behemoth reported earnings per share of 29 cents, beating the Zacks Consensus Estimate of 27 cents. This also compared favorably with 3 cents earned in the prior-year quarter.

Results for the fourth quarter were primarily aided by a substantial reduction in the provision for credit losses and higher top line. A reduction in noninterest expenses was a contributor this quarter.

Shares of BofA gained nearly 3% in the pre-trading session, indicating that the market is encouraged with this release. The price reaction during the trading session will give a better idea about whether BofA has been able to meet expectations.

Results for the quarter included negative DVA/FVO adjustments of $0.6 billion (pre-tax) and litigation expense of $2.3 billion (pre-tax). Considering effective tax rate of 10.6%, these items had about 22 cents per share negative impact on earnings. Otherwise, BofA would have earned 51 cents per share.

The quarter witnessed improved credit quality across major portfolios, higher brokerage income and growth in loan and deposit balances. However, these positives were partially offset by a decrease in equity investment income and lower asset yields.

Investment banking performance remained decent, thanks to improved capital market activities. BofA Merrill Lynch gained market share in this area and maintained its #2 rank in Global Investment Banking fees with an 8.0% market share. Also, it achieved #1 rank in investment banking fees in the Americas with 10.7% market share during the quarter. Losses in Consumer Real Estate Services also decreased over the year-ago quarter.

The company significantly strengthened its balance sheet and showed improvement in capital ratios. Improved time-to-required funding and reduced long-term debt were also among the positives.

For the full year, earnings per share came in at 90 cents, in line with the Zacks Consensus Estimate. Earnings for the year improved from 25 cents reported in 2012.

Quarter in Detail

Excluding DVA and FVO, fully taxable-equivalent revenues (net of interest expense) were $22.3 billion, up 14% from $19.6 billion in the prior-year quarter. However, this was lower than the Zacks Consensus Estimate of $22.8 billion.

Net interest income on a fully taxable-equivalent basis was $11.0 billion, up 4% from $10.6 billion in the year-ago quarter. Reduced long-term debt balances and yields, favorable market-related adjustments from lower premium amortization, lower rates paid on deposits, and higher commercial loan balances were the drivers. Net interest margin improved 21 basis points (bps) year over year to 2.56%.

Noninterest income came in at $10.7 billion, up 28% from $8.3 billion in the prior-year quarter. The reasons for this improvement were lower representations and warranties provision and year-over-year improvement in both investment banking fees and investment and brokerage income. However, lower equity investment income partially offset the positives.  

Noninterest expense was $17.3 billion, down 6% year over year. Reduced expenses in Legacy Assets and Servicing (LAS) and lower personnel expense were the main contributors to the reduction. Higher litigation expense partially offset the improvement.

Book value per share as of Dec 31, 2013 was $20.71 compared with $20.50 as of Sep 30, 2013 and $20.24 as of Dec 31, 2012. Tangible book value per share as of Dec 31, 2013 was $13.79 compared with $13.62 at the end of the prior quarter and $13.36 at the end of the year-ago quarter.

Credit Quality

Supported by the ongoing economic recovery, credit quality continued to improve during the quarter with net charge-offs declining across almost every major portfolio from the prior-year quarter. Provision for credit losses decreased 85% year over year to $336 million.

As of Dec 31, 2013, nonperforming loans, leases and foreclosed properties ratio was 1.93%, down 24 bps sequentially and 69 bps year over year. Quarter end net charge-off ratio decreased 5 bps sequentially and 72 bps year over year to 0.68%.

Capital Ratios

At the end of the reported quarter, the company’s Tier 1 common capital ratio including market risk final rule was 11.19% compared with 11.08% at the end of the prior quarter. Tangible common equity ratio was 7.20% compared with 7.08% at the end of the prior quarter and 6.74% at the end of the prior-year quarter.

Our Viewpoint

BofA continues to show strength in its balance sheet and liquidity. Nevertheless, we expect continued litigation and various regulatory issues to stain its results in the near to medium term.

Overall, the company has recovered significantly over the last few quarters, as evident from its earnings streak. In addition to realigning its balance sheet in accordance with regulatory changes, the company has taken measures to contain cost. These efforts vouch for better prospects.

Earnings of Other Major Banks

Among other banking giants, JPMorgan Chase & Co. (JPM - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report) have come out with fourth quarter results so far. Both these banks delivered positive earnings surprises this time, indicating good going by the sector. It is worth mentioning that JPMorgan remained in good shape even after resolving its legal issues. Another mega player Citigroup Inc. (C - Analyst Report) is scheduled to report earnings on Jan 16. 

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