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Bank of America Corporation (BAC - Analyst Report) has delivered a negative earnings surprise of about 13% for the first quarter of 2013. The banking behemoth reported earnings per share of 20 cents, missing the Zacks Consensus Estimate of 23 cents. However, this compares favorably with the earnings of only 3 cents in the prior-year quarter.

Results for the reported quarter were aided by an improved top line, a substantial slowdown in the provision for credit losses and a reduction in noninterest expenses. However, lower mortgage banking income and reduced net gains on the sales of debt securities faded the shine of its bottom line.  

The quarter witnessed improved credit quality across major portfolios, higher brokerage income and a compelling investment banking performance, thanks to better capital market activities. BofA maintained its #2 rank in Global Investment Banking fees. Yet, consumer real estate losses increased over the year-ago quarter.

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

BofA expects to start actions related to its 2013 capital plan in the second quarter. The company received the Fed’s approval for preferred stock redemptions of $5.5 billion and common stock repurchases of $5 billion.
 
Quarter in Detail

Fully taxable-equivalent revenues (net of interest expense) were $23.7 billion, up 5% from $22.5 billion in the prior-year quarter. Revenues also surpassed the Zacks Consensus Estimate of $23.4 billion.

Net interest income on a fully taxable-equivalent basis was $10.9 billion, down 2% from $11.1 billion in the year-ago quarter. Reduction in consumer loan balances and lower asset yields due to a low rate environment were primarily 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 2.43% from 2.51% in the year-ago quarter.

Noninterest income came in at $12.8 billion, up 12% from $11.4 billion in the prior-year quarter. The improvement was aided by the absence of negative FVO adjustments during the quarter.  

Non-interest expense was $18.2 billion, down 5% from $19.1 billion in the year-ago quarter. Project New BAC initiatives and ongoing focus to cut costs to service delinquent mortgage loans primarily reduced the non-interest expense.

Book value per share as of Mar 31, 2013 was $20.30 compared with $20.24 as of Dec 31, 2012 and $19.83 as of Mar 31, 2012. Tangible book value per share as of Mar 31, 2013 was $13.46 compared with $13.36 at the end of the prior quarter and $12.87 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 22% sequentially and 29% year over year to $1.7 billion.

As of Mar 31, 2013, nonperforming loans, leases and foreclosed properties ratio was 2.53%, down 9 basis points (bps) sequentially and 57 bps year over year. Net charge-off ratio decreased 26 bps sequentially and 66 bps year over year to 1.14%.

Capital Ratios

At the end of the reported quarter, the company’s Tier 1 common capital ratio (Basel 1) was 10.58% compared with 11.06% at the end of the prior quarter and 10.78% at the end of the prior-year quarter. Tangible common equity ratio was 6.94% compared with 6.74% at the end of the prior quarter and 6.58% at the end of the prior-year quarter. As of Mar 31, 2013, the Tier 1 common capital ratio under Basel 3 was estimated at 9.42%, up from 9.25% as of Dec 31, 2012.

Competitive Landscape

Among other banking giants, 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 first quarter results and upheld the banking image.

Banks have been primarily reporting strong results on the back of favorable macroeconomic elements, including strong capital market activities, rising new home purchases and falling unemployment. While the results for JPMorgan and Wells Fargos were primarily aided by solid expense management, Goldman’s results largely benefited from an improved top line.

Our Viewpoint

BofA’s progress in strengthening its balance sheet is 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, which is evident from its recent stress test clearance. 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 going forward.

BofA currently carries a Zacks Rank #3 (Hold).

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