Bank of America Sees Strong Operational Improvement Despite Q1 Loss
Bank of America (NYSE:BAC) reported an unexpected loss for the first quarter by setting aside billions in legal reserves in a move that is reminiscent of the kitchen-sink approach which competitor JPMorgan Chase (NYSE:JPM) pulled off in the third quarter of 2013. [1] While the bank was expected to take a $3.7-billion hit to its pre-tax income for the period due to its recently announced $9.5 billion settlement with the FHFA, the actual legal charge reported by Bank of America was $6 billion – indicating that another settlement may be in the cards. [2]
With each settlement to put its legacy mortgage-related issues to rest, the bank is taking a step in the right direction, and removing the impact of this $6 billion legal charge from its Q1 results highlights more good news. Q1 2014 was operationally one of the best quarters for the bank since the economic downturn of 2008. In fact, the bank generated almost the same amount in revenue as it did in Q1 2013, and its trading revenues also remained unchanged unlike peers JPMorgan and Citigroup (NYSE:C) who reported considerably lower trading revenues in the quarter.
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We maintain our $18 price estimate for Bank of America’s stock, which is about 10% ahead of current market prices.
See our full analysis for Bank of America’s stock here
Investment Banking Operations Buck Industry Trends
Bank of America reports the performance of its trading operations as a part of its Global Markets operating division. Excluding the impact of CVA/DVA on its trading revenues, the bank reported revenues of just under $3 billion for its FICC (fixed income, currency and commodities) trading desk and $1.15 billion for its equities trading desk in Q1 2014 – nearly identical to what these desks generated for the same period last year. In comparison, JPMorgan’s trading revenues fell by 18% between these quarters, while Citigroup reported a 15% reduction. This strong trading performance helped Bank of America generate total revenues in line with what it did a year ago, even as its competitors saw their top-line figures shrink on a year-on-year basis.
Global Wealth & Investment Management (GWIM) Reported Another Strong Quarter
In addition to a resilient performance by its investment banking division, Bank of America reported record revenues for its wealth management division, which roped in a little over $4.5 billion for the quarter. Helped by the increase in long-term assets under management by $17.4 billion for the period, the bank ended Q1 just shy of $2.4 trillion in client balances.
The quarter was also the most productive for Bank of America in terms of the internal “Financial Advisor Productivity” metric it reports. This metric captures the ratio of annualized revenues for the division to the total number of advisors and it stood at $1,056 for Q1 – the highest level this metric has reached since Bank of America acquired Merrill Lynch in September 2008.
Focus On Cutting Costs Ensures Future Sustainability And Growth
Bank of America’s large-scale reorganization plan – Project New BAC – hinges on the bank’s ability to cut operating costs over the next couple of years by getting rid of redundancies and by streamlining its diversified business model. The bank has reduced its global workforce from just under 290,000 at the beginning of 2011 to just over 238,500 now – an 18% reduction over the period. The bank has also shuttered more than 700 branches (5,805 then vs. 5,095 now) and has sold off a number of non-core business units. As a result, the bank’s total non-interest expenses (adjusted for one-time items) is at the lowest level since it consolidated the acquired operations from Merrill Lynch and Countrywide in 2008.
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Notes:- Bank of America Reports First-quarter 2014 Net Loss of $276 Million, or $0.05 per Diluted Share, on Revenue of $22.8 Billion(A) Results, Bank of America Press Releases, Apr 16 2014 [↩]
- Bank of America Announces Settlements With Federal Housing Finance Agency (FHFA) and New York Attorney General, Bank of America Press Releases, March 26 2014 [↩]