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Bank of America Corporation (BAC - Analyst Report) reported fourth-quarter 2012 earnings of 3 cents per share, which managed to beat the Zacks Consensus Estimate by a cent. However, this compares unfavorably with the earnings of 15 cents in the prior-year quarter. This represents the fourth straight quarter with a positive earnings surprise for this mega bank.

Results for the reported quarter were aided by a substantial slowdown in the provision for credit losses and a reduction in non-interest expenses. A significant contraction in the top line faded the shine of its bottom line to a great extent.  

The quarter witnessed an improvement in credit quality across major portfolios and a compelling trading performance, thanks to better capital market activities during the quarter. Also, strong mortgage banking and investment banking performances as well as improved commercial lending were among the drivers. On the flip side were an increase in consumer real estate losses related to the Fannie Mae settlements and the provision for the IFR acceleration agreement.

As previously announced by the company, results for the quarter were negatively impacted by certain special items – provision of $2.7 billion for the settlements with Fannie Mae, other provision of $2.5 billion for items including the IFR agreement, debit valuation adjustments (DVA) and fair value option (FVO) of $0.7 billion.

However, a net income tax benefit of $1.3 billion, a gain of $0.4 billion related to its stake in Mitsubishi UFJ Merrill Lynch PB Securities and a valuation adjustment of $0.3 billion on mortgage servicing rights (MSR) were the offsetting factors. These items had an 18-cent per share negative impact on earnings. Otherwise, Bank of America would have earned 21 cents per share during the quarter.   

The company made significant progress in strengthening its balance sheet during the quarter, reflected by improved capital ratios. Strong time-to-required funding and reduced long-term debt were also among the positives.

For full-year 2012, earnings were 25 cents per share compared with just a cent in the previous year. The results also surpassed the Zacks Consensus Estimate by a penny.
 
Quarter in Detail

Fully taxable-equivalent revenues (net of interest expense) were $18.9 billion, down 25% from $25.1 billion in the prior-year quarter. Revenues also missed the Zacks Consensus Estimate of $21.3 billion.

For the full year, revenues (net of interest expense) came in at $84.2 billion, missing the Zacks Consensus Estimate of $87.5 billion and the year-ago revenues of $94.4 billion.

Net interest income on a fully taxable-equivalent basis was $10.5 billion, down 4% from $11.0 billion in the year-ago quarter. Reductions in consumer loan balances were largely responsible for the downfall, which was partially offset by a reduction in long-term debt balance and lower rates paid on deposits. Net interest yield deteriorated to 2.35% from 2.48% in the year-ago quarter.

Noninterest income came in at $8.3 billion, down 41% from $14.2 billion in the prior-year quarter, primarily due to mortgage banking losses as a result of the Fannie Mae settlement.  

Non-interest expense was $18.4 billion, down 3% from $18.9 billion in the year-ago quarter. A decrease in personnel expense due to its cost saving initiatives primarily reduced the non-interest expense.

Book value per share as of Dec 31, 2012 was $20.24 compared with $20.40 as of Sep 30, 2012 and $20.09 as of Dec 31, 2011. Tangible book value per share as of Dec 31, 2012 was $13.36 compared with $13.48 at the end of the prior quarter and $12.95 at the end of the year-ago quarter.

Credit Quality

With speedier economic recovery, credit quality continued to improve during the quarter with net charge-offs declining across almost all major portfolios from the prior-year quarter. Provision for credit losses decreased 25% year over year to $2.2 billion.

As of Dec 31, 2012, nonperforming loans, leases and foreclosed properties ratio was 2.62%, down 39 basis points (bps) from the prior-year period. Net charge-off ratio decreased 34 bps year over year to 1.40%.

Capital Ratios

At the end of the reported quarter, the company’s Tier 1 common capital ratio (Basel 1) was 11.06% compared with 11.41% at the end of the prior quarter and 9.86% at the end of the prior-year quarter. Tangible common equity ratio was 6.74% compared with 6.95% at the end of the prior quarter and 6.64% at the end of the prior-year quarter. As of Dec 31, 2012, the Tier 1 common capital ratio under Basel 3 was estimated at 9.25%, up from 8.97% as of Sep 30, 2012.

Competitive Landscape

Among BofA’s competitors, JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and The Goldman Sachs Group Inc. (GS - Analyst Report) have already reported better-than-expected fourth quarter results and upheld the banking image. Banks have been primarily reporting strong results on the back of improved capital market activity and healthy mortgage business. Results for JPMorgan, Wells Fargos and Goldman were primarily aided by improved top line.

Among the other Wall Street majors, Citigroup Inc. (C - Analyst Report) has released its earnings today and Morgan Stanley (MS - Analyst Report) will report on Jan 18.

Our Viewpoint

BofA has been making significant progress in strengthening its balance sheet as reflected by improved capital ratios. Nevertheless, we expect continuous litigations and various regulatory issues to impact its results in the near to medium term.

Overall, the company is making every effort to keep itself afloat. In addition to realigning its balance sheet in accordance with regulatory changes, the company has taken measures like cost containment and asset quality improvement.

BofA currently retains a Zacks Rank #3 (Hold). Also, we maintain a long-term Neutral recommendation on the shares.

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