Bank of America (NYSE:BAC) gave investors a welcome surprise this Wednesday morning when it reported a slim profit for the third quarter.  The banking giant managed to keep its quarterly earnings figure out of the red despite taking a pre-tax accounting charge of $1.9 billion from the revaluation of its debt and an additional pre-tax $1.6 billion litigation charge from its Merrill Lynch lawsuit settlement. Overall growth in its loan portfolio was complemented by strong mortgage banking and investment banking performances over the quarter to help the bank maintain its top-line numbers at levels similar to the previous quarter.
We maintain our $10 price estimate for Bank of America’s stock – a figure close to its current market price.
Mortgage Banking Business Improves, But Still Chasing Elusive Profits
Bank of America’s has been focusing the efforts of its mortgage banking business towards cleaning up its legacy portfolio – a large chunk of problem mortgages being transferred to its books with the acquisition of Countrywide. The reduced focus on new mortgages is evident from the fact that the division produced just above $21 billion new loans this quarter – down from almost $34 billion over the same quarter last year. The mortgage servicing portfolio also reflects the same strategy as its size has decreased consistently each quarter from almost $2 trillion in Q3 2011 to under $1.5 trillion in Q3 2012.
But low interest rates and the government-backed Home Affordable Refinance Programs (HARP) drove home-owners to the bank in large numbers to refinance their existing mortgages, boosting revenues for the division. Bank of America’s mortgage business as a whole (reported as ‘Total consolidated mortgage banking income” in the earnings supplement) generated more than $2 billion in quarterly revenues for just the second time since Q2 2009. And although the bank has done quite well to curtail the division’s losses over recent quarters, the division is still waiting for a quarterly profit since early 2008.
Improving Debt Capital Markets Also Played A Part In Boosting Revenues
Global markets saw a recovery over a large part of this quarter, and Bank of America’s investment banking unit capitalized on this improvement. The bank’s fixed-income sales and trading division reported a pre-adjustment revenue of $2.5 billion for the quarter – almost the same as that over Q2 2012 and almost five-times the $553 million generated in Q3 2011. Debt issuance also helped the bank rope in an additional $341 million for the quarter – a notable improvement over the $247 million over the previous quarter and the $227 million earned over the year-ago period.Notes: