Bank of America (NYSE:BAC) stayed out of the red in the last quarter of 2011 and the market in turn rewarded the troubled bank by sending its shares above $7 for the first time since last October. ((Fourth quarter earnings press release, Bank of America Press Releases, Jan 19 2012)) That investors did not pay much heed to the fact that the bank showed a decline in revenue and earnings figures for each of its operating businesses in Q4 2011 lends support to our belief that the extremely difficult economic scenario set investor expectations from banks quite low. We spoke about this in our article, Bank of America Q4 Earnings Preview: What We’re Watching Thursday, and competitors Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) were also subjected to a similar treatment.
While the one-time items that have significantly contributed significantly to Bank of America’s Q4 numbers have not escaped scrutiny, the bank’s efforts in “building a fortress balance sheet” by raising its Tier 1 capital ratio to nearly 10% has helped calm investor doubts about the bank’s long term sustainability.
We stick to our $9 price estimate for Bank of America’s stock and believe that the 20% premium over its current market price can be attributed to widespread pessimism among investors toward banking stocks in general in the wake of the deteriorating European debt crisis.
See our full analysis for Bank of America’s stock
No Turnaround Yet for Mortgage Business
Bank of America’s mortgage business, which arguably went from bad to worse with the acquisition of Countrywide, continues its long spell of losses which began with the global economic downturn of 2008. The division added another billion of provisions over the quarter in expectation of bad loans, besides a $1.5 billion in litigation expenses.
Adding all the settlement, provision and other litigation expenses for Bank of America’s mortgage business over the year 2011 presents a whopping $20 billion bill for the ailing business. This is more than the $13 billion and $15 billion in similar costs the bank incurred in 2009 and 2010 respectively.
Trading Operations Also Drew From the Bottom-Line
Bank of America also reported an expected loss from its sales & trading operations, with its Global Banking and Markets business unit ending up in the red by nearly half a billion dollars. The extremely volatile market conditions over the second half of the year hardly left any hope of a profit from trading, and the tightening of credit spreads put an additional $474 million pre-tax burden on results due to a revaluation of debt figures.
We are in the process of updating our estimates for Bank of America.
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