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Bank of America Corp (BAC) Came Short On Earnings, Buy Shares Anyway

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Bank of America Corp (NYSE:BAC)’s earnings missed analyst estimates. Bank of America Corp (NYSE:BAC) reported earnings of $0.21 per share. Analysts, on a consensus basis, were expecting earnings of $0.22. Bank of America Corp (NYSE:BAC) was the only bank, among the systematically important ones, to miss earnings. The decline in earnings came from the decline in revenue from its Consumer & Business Banking Segment. The company saw an increase in the amount of its deposits without an increase in lending or leasing.

Bank of America CorpResults about the same as everyone else

Bank of America Corp (NYSE:BAC)’s results closely mirrored that of its competitors. The company was able to grow bottom line earnings, even as top-line revenue declined. The company will be shedding its head count in order to generate earnings growth. Bank of America Corp (NYSE:BAC), like JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc (NYSE:C), and Wells Fargo & Co (NYSE:WFC), was unable to generate revenue growth. The large banks either reported small advances in revenue, or small declines in revenue. Another noticeable theme is that large banks were able to grow bottom lines by a large margin this quarter. Citigroup Inc (NYSE:C) was able to grow basic EPS year-over-year by 27.82%, with Wells Fargo & Co (NYSE:WFC) growing EPS by 22.37%, and U.S. Bancorp (NYSE:USB) reporting year-over-year EPS growth of 7.35%. Bank of America Corp (NYSE:BAC), on the other hand, generated 600% year-over-year EPS growth. The company reported the highest rate of EPS growth among its peers.

Bank results

The larger banking institutions have been able to avoid the court-room. This has kept legal costs under control, which has contributed to bottom line growth. Bank of America reported a decline in its non-interest expenses, from $19.14 billion in 1Q12, down to $18.15 billion in 1Q13. The allowances for loan losses decreased from 3.61% in 2012 down to 2.49% in 2013. The company saw improvements in its lending portfolio, as net charge-offs have declined from 1.80% in 1Q12 to 1.14% in 1Q13. The decline in charge-offs, along with declining litigation-related charges and declining loan loss allowances, has led to the bottom line growth. The banking business environment is starting to stabilize, and organic revenue growth is coming back into the mix.

Housing starts have been increasing due to household formations and improving demand for housing. Banks will be increasing lending in future accounting periods, based on construction data for housing. This should lead to increasing interest income from loans in the immediate future.

The CEO, Brian Moynihan, plans on sustaining net-income growth by cutting back costs by an additional $8 billion through 2015. Investors are willing to pay a 28.3 multiple on earnings, due to the anticipated cost-cuts that are likely to generate substantial bottom line improvement. The bottom line improvements is the primary earnings catalyst going forward.

Peer comparisons

JPMorgan Chase & Co. (NYSE:JPM) offers the lowest P/E multiple among the major four banks, but the downside is the bank’s risk to exposure to the credit markets. JPMorgan has demonstrated an inability to properly structure derivative risk portfolios in the past with its London Whale disaster. That being the case, investors who have the patience to see the stock trade at a much fairer valuation than 8.7 times earnings over multiples should buy the heavily under-valued bank.

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