Bank of America: Look to Peers for Better Value
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looking at and understanding Bank of America’s (NYSE: BAC) financial releases is akin to looking at a large jigsaw puzzle. The underlying bank and fee earnings may make the border, but the inside is so filled with misaligned, mismatching pieces, that it is a tough puzzle really to grasp. The bottom line is that in the first quarter of 2012, the nation's second largest bank posted earnings of $653 million, or three cents a share. Since over the past several years, posting any earnings at all has been a challenge to Bank of America, the quarter was at least a partial success.
As always with Bank of America, the quarter was rife with one time charges and credits. On the positive side, the company booked about $3 billion in gains from proprietary equity sales, debt sales, and gains on trust preferred repurchases. On the negative side, retirement compensation and litigation costs ate up $1.7 billion and adjustments to derivatives and debt values were a negative $4.8 billion. With many large banks, commercial and investment, these quarterly debt valuation adjustments have totally overshadowed underlying earnings. I find it frustrating. If we take out all of these debits and credits from earnings, earnings would have risen by about $3.5 billion pretax or about $2.4 billion after tax, to a total of just over $3 billion.
Analysts have instead focused only on the $4.8 billion revaluation charge. This is not a one-time issue, as this large debit will at some point become a credit. But if that charge is omitted, earnings would have been $0.31 per share for the quarter, above analysts’ expectations of $0.12 per share.
Is Bank of America out of the woods after years of massive mortgage related losses? Not even close. First, the bank has taken itself out of the practice of mortgage purchases from smaller banks meaning that its mortgage holdings exclusively will be its own originations. Next, it ratcheted up its dispute with Fannie Mae by halting the sale of loans to that government backed agent. In 2007, Bank of America accounted for 25% of mortgage originations; today that market share is close to 5%.
That dispute with Fannie Mae may well be Bank of America's next big problem. As part of the billions of dollars of loan sales Bank of America and Countrywide Financial made to Fannie Mae, it was always agreed that in the case of material omissions or fraud in mortgage applications, Bank of America would reimburse Fannie Mae, or other purchasing agencies, for their losses. In the first quarter of 2012, the amount of those claims reached over $16 billion, and Bank of America has not reserved for more than token losses in that area.
Overall, in the first quarter of 2012, non-interest expenses fell on a year over year basis by about $1.1 billion. Also in the first quarter of 2012, Bank of America's provision for loan losses fell $1.4 billion from the year ago quarter to $2.4 billion. It was the smallest quarterly provision since 2007, and again speaks to how unprofitable Bank of America's underlying business model is.
I watched in fascination as Bank of America's stock price had doubled between December, 2011 and March, 2012. It has retreated some since then, and I cannot imagine anyone choosing Bank of America over the many quality financial stocks that exist.
PNC Financial Group (NYSE: PNC) reported a solid first quarter, during which it closed on the United States branch network of RCB Bank. Earnings in the quarter came to $811 million, or $1.44 per share. The quarter compared well with analysts' expectations of $1.43 for the quarter, and nearly doubled the total from the fourth quarter of 2011. But it did come in eight percent below the first quarter of 2011's $1.57 per share. Largely because of the acquisition, interest income increased about $200 million, or 5% year over year, and non-interest expenses rose by nearly $400 million, or 19%. PNC's provisions for loan losses of $185 million were a steep, 56% decline from the $421 million provision made in the year ago quarter. The various increases and decreases balanced out enough to allow a solid, 1.16% return on assets.
Looking forward, PNC will be able to ring over $300 million in annual savings from the RBC deal, which did not dilute the stock and is already accretive. The stock may be a bit overpriced today with a 5 year PEG on the high side for banks at 1.65. But upon any dips, I would go long on PNC, and enjoy the dividend, which pays 2.5% even at today's high stock price. Look for an entry price below $60.
Fifth Third Bancorp (NASDAQ: FITB) has long been one of my favorite banks in the country, and certainly is the premier bank in profitability and efficiency in the lower Midwest. It did nothing to disappoint in the first quarter of 2012, as it posted earnings of $421 million, or $0.45 per share, a fourfold increase from the year ago quarter. Profits also trounced analysts' expectations of $0.37 for the quarter. Part of the big earnings level was due to a one-time benefit of a spin off of its credit card processing ownership that raised a profit of $115 million. The company had expected a $95 million benefit. Even absent the sale, profits would roughly have tripled the year ago quarter. Excluding one-time factors, Fifth Third's return on assets was about 1.10%
One way that Fifth Third stood out from its large bank peers is that it took advantage of the one-time benefit and actually raised its provision for loss reserves compared with the fourth quarter of 2011. It did this despite a declining level of non performing loans. If I were a shareholder of Fifth Third, I would have been pleased to see my company act so responsibly. The $91 million provision in the first quarter, however, was $78 million less than the same quarter of 2011.
Fifth Third is expected to have slow, but steady growth. Making a suitable acquisition would make a lot of sense for the company. It offers a market average 2.3% yield, and makes sense for conservative investors at this time.
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