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Bank of America Corporation (BAC - Analyst Report) lost its earnings momentum to tough industry backdrop and reported a loss of 5 cents in the first quarter. This is a significant miss from the Zacks Consensus Estimate of earnings of 5 cents and also compares unfavorably with 10 cents earned in the prior-year quarter.

Litigation expense and related legal reserves previously announced by the company are primarily responsible for such a disappointing outcome. Moreover, lack of top-line improvement, higher provision and an unfavorable expense trend put no less pressure on the bottom line.

Shares of BofA lost around 3% in the morning trade, indicating that the company disappointed even more than what the market apprehended. The price reaction during the full trading session will give a better idea about whether investors consider the underlying strength in the company.

Looking at the details, the company incurred $6.0 billion (pre-tax) in litigation expense, including $3.6 (pre-tax) billion related to the settlement with the Federal Housing Finance Agency (FHFA). This had roughly 40 cents per share (after tax) impact on earnings. Otherwise, BofA would have earned 35 cents per share. Also, there was an impact from additional reserves related to the legacy mortgage-related issues.

The quarter witnessed improved credit quality across major portfolios, higher investment and brokerage income and equity investment income. However, lower mortgage banking income and lower trading account profits were the downsides.

Investment banking performance remained decent despite volatile capital market activities. BofA Merrill Lynch maintained a leadership position in investment banking with fees of $1.5 billion. While Consumer and Business Banking showed solid income growth over the year-ago quarter, losses in Consumer Real Estate Services increased significantly.

The company’s balance sheet position remained stable and it showed improvement in capital ratios. Reduced long-term debt due to maturities and efficient liability management was also among the positives.

Quarter in Detail

Excluding net DVA, fully taxable-equivalent revenues (net of interest expense) were $22.7 billion, down 4% from $23.6 billion in the prior-year quarter. However, this was higher than the Zacks Consensus Estimate of $22.5 billion.

Net interest income on a fully taxable-equivalent basis was $10.3 billion, down 5% from $10.9 billion in the year-ago quarter. Reduced yields on debt securities were primarily responsible for this decline. Net interest margin improved 6 basis points (bps) year over year to 2.36%.

Non-interest income was flat at $12.5 billion. This is because lower mortgage banking and trading account income were offset by higher investment and brokerage income, and equity investment income.

Non-interest expense was $22.2 billion, up 14% year over year. Higher mortgage-related litigation expense was partially offset by reduced other expenses in Legacy Assets and Servicing (LAS).

Book value per share as of Mar 31, 2014 was $20.75 compared with $20.71 as of Dec 31, 2013 and $20.19 as of Mar 31, 2013. Tangible book value per share as of Mar 31, 2014 was $13.81 compared with $13.79 at the end of the prior quarter and $13.36 at the end of the year-ago quarter.

Credit Quality

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 41% year over year to $1.0 billion.

As of Mar 31, 2014, nonperforming loans, leases and foreclosed properties ratio was 1.96%, down 57 bps year over year. Quarter end net charge-off ratio decreased 6 bps sequentially and 52 bps year over year to 0.62%.

Capital Ratios

At the end of the reported quarter, the company’s common equity tier 1 capital ratio (Basel 3 Transition) was 11.8% compared with 11.7% at the end of the prior quarter. Tangible common equity ratio was 7.0% compared with 7.2% at the end of the prior quarter and 6.9% at the end of the prior-year quarter.

Our Viewpoint

The company recovered significantly over the last few quarters, as evident from its earnings streak up through the fourth-quarter 2013 and underlying strength so far. In addition to realigning its balance sheet in accordance with regulatory changes, the company has been extensively focusing on cost containment. However, the latest financial performance indicates a pause to its turnaround story.

We expect litigation and various regulatory issues to stain its results in the upcoming quarters as well. Now, growth would depend on how the company can efficiently evade the challenges with its measures.

Earnings of Other Major Banks

Among other banking giants, JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and Citigroup Inc. (C - Analyst Report) have come out with first quarter results so far. While JPMorgan started the season with a huge miss due to its inability to endure the tough industry circumstances, both Wells Fargo and Citigroup could override the challenges and beat estimates with ease.

Though the impact of sluggishness in the industry is evident in the results of banks so far, the strength to dodge such headwinds appears much better than expected. 

Read the Full Research Report on BAC
Read the Full Research Report on JPM
Read the Full Research Report on WFC
Read the Full Research Report on C


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