Bank Of America's 2013: Looking Good, But Not Great

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Bank of America (NYSE: BAC) is one of the largest banks in the US. The company’s stock has gained more than 70% in value since mid-summer and the fiscal cliff deal works in BAC's favor.

Average Financials

Bank of America reported a sharp decline in profit during the third quarter of 2012. The company reported net income of $340 million before paying preferred dividends. The bank posted a $33 million net loss on results applicable to common shareholders.

Competitors

Bank of America reported the best capital levels as against its peers, in the recent report by Forbes. The Bank reported a Basel III tier 1 capital ratio of 8.97%, ahead of JPMorgan (NYSE: JPM), and Citigroup (NYSE: C).                                              

The net interest margin of Bank of America is 2.31% which is less compared to its rivals. JPMorgan has net interest margin of 2.43%, Citigroup NIM is 2.86%, and Wells Fargo’s is 3.66%.

JPMorgan's fourth quarter profit was up 53%, beating analyst forecasts. The bank was able to up its customer service score by 6% when compared to 2011. The score, although better than all the larger banks is behind the scores awarded to smaller banks. Last year, the bank hired about 13000 employees, with most of them helping to process troubled mortgages.

Citigroup fourth quarter earnings missed analyst estimates, with revenues down by 4% from the last quarter and less by 8% from the previous year. Net interest margin for the bank improved to 2.93%, while the group posted a net credit loss of $3.1 billion, down by 25%. With an objective to save more than a billion dollar expenses out of its annual expenses, Citi announce plans to cut more than 11,000 jobs, mainly from its institutional client group and from global consumer banking business

Settlement with Fannie Mae:

Bank of America took a huge step when it declared the settlement with Fannie Mae regarding ongoing repurchase claims for fraudulent mortgages sold by its Countrywide financial subsidiary through Dec 31, 2008. This move will particularly help the bank to reduce its legal liability, removing a large amount of drag in its stock prices.

The settlement with Fannie Mae according to a series of analysts came in good time. It will reduce the uncertainty around the mortgage repurchase losses, and will prove beneficial in reducing expenses and balance sheet risks heading into 2013.

BAC though seems to be in a good position after the Fannie Mae settlement but not for very long. The Bank has agreed to $43.5 billion in settlements which include Fannie Mae, as well as its portion of the $8.5 billion agreement by 10 big banks regarding improper foreclosure practices in 2009 and 2010.

The ongoing litigation with the Department of Justice and MBIA will also knock the current huge amount of the settlement money even higher. It is estimated to reach $ 3 billion or more.

Savings from Mobile Banking

The Mobile Banking segment surged by 30% in 2012 and reached 11.1 million users. With 40 million households banking with BAC, the cost savings available by moving the remaining 29 million customers to mobile is incredible. The savings from directing the average customer to mobile will more than counterbalance the higher cost incurred in personal service for the rich, who are dependable for growth in BofA’s wealth management segment.

Balance sheet risk

Though settling litigation rightfully reduces the uncertainty and risk in the Balance sheet, the sale of $400 billion in mortgage servicing rights constituting approximately a quarter of the bank's servicing business, is also vital.

Bank of America keeps on reducing its mortgage risk. At present, the Bank is in talks to sell the mortgage servicing rights on more than $300 billion of loans in its continued efforts to offload problem mortgage exposure. Even though, costs have increased in 2012 for this division, CEO Brian Moynihan believes the bank is doing well to control expenses and should be able to get them down to about $500 million per quarter-down from $3.4 billion in the third quarter.

In the end of the last quarter, BAC’s MSR (Mortgage Servicing Right) balance was recorded at $5.1 billion. MSR balances are added to capital, but the allowed contribution will reduce to a maximum of 10% of the MSR balance, from 100% presently, as per the Basel 3 guidelines. This does not seem like to be an issue for BAC as its MSR balance is less than 5% of "Tier 1" capital of $135 billion.

Conclusion

According to BAC its fourth quarter will have some items associated to the settlement and other matters. The bank estimates modest positive earnings for the quarter. The large part of this settlement will be paid within 2013.

Since the stock of BAC soared in later 2012, it may face some hurdles in maintaining its current pace of growth in the coming quarters. So, 2013 may not be a ‘value growth’ year for the bank, but it will be a good year for the company as it amends it past problems.


valuewalk has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs Group. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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