Beyond Bank of America’s Numbers
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
So Bank of America (NYSE: BAC) beat estimates, showed a healthy profit compared to Q4 of last year and the stock is up 4.5%; what’s not to love? A few things actually -- the manner in which the numbers were arrived at, the huge disparity between analysts’ interpretations of the results and a depressing trend in loan volume. That’s quite a mouthful, so let’s break this down an item at a time.
When the smoke cleared Bank of America ended the last quarter with a $1.99 billion profit compared to a loss of $1.24 billion last year. The bank’s capital reserves jumped too and these two items in particular seem to be what bullish investors are hanging their hats on. This, they claim, is the beginning of the turnaround we’ve all been waiting for. But hold on.
There were so many one-time charges and capital infusions from asset sales and the like it’s hard to decipher what really happened as it relates to what matters -- revenue and profit from core banking activities. As a recent article suggested, the banks that investors should focus on are those that are making strides toward doing what banks are supposed to do -- make themselves and their shareholders money by extending loans and credit, packaging profitable products and creating new, innovative customer solutions.
Back to Basics
Wells Fargo’s (NYSE: WFC) recently announced numbers are a prime example of how it should be done. Cost cutting and increased loan volume, among others, drove not only respectable numbers but just as importantly to investors, sustainable numbers.
What we saw from BAC this morning, and to a lesser extent the disappointing results from Citi (NYSE: C) earlier this week, are indicative of institutions that need to get back to basics. Citi seems to be making strides, showing an increase in loan volume, but the bank’s exposure to capital markets continues to hinder Citi, and JP Morgan (NYSE: JPM) is in the same boat.
Back to Bank of America
The numbers announced from BAC included profits in the billions from asset sales, charge-offs and expenses for loans and a hefty gain from debt re-structuring. Of course none of these are sustainable and this is where the wild discrepancies arise. Removing all these items -- or only including some -- have analysts stating everything from missing expectations by huge margins to beating them by a mile. What’s an investor to do?
Two suggestions -- One, avoid them like the plague until they can report tangible growth in core banking activities. There are other financial stocks out there that are beginning to make money from banking, not unsustainable one-time sales and debt swaps. Precipitous drops in trading and investment banking also hurt BAC, and just as with JPM, this will likely continue for the foreseeable future.
The other suggestion is to treat BAC as a day or short-term trader would. Today’s activity is clearly based on a cursory look at results without regard to long-term, sustainable growth. Grab your 4% or 5% momentum growth, get out and wait until the next glossed-over financial announcement and ride the wave again. Until Bank of America can show growth in core banking activities, investors are going to be in for a wild ride.
The investment opinions included are just that, opinions. Tim is not a licensed investment professional, nor has he been for several years. Investing involves risk, as you well know, so consider your decisions wisely.