Unlike the rest of its peers, Bank of America Corp (NYSE:BAC) reported an earnings miss on a revenue beat on legal-settlement stings. For the first quarter, Bank of America reported earnings per shares of $0.20, which was $0.02 below the consensus estimate, while the reported revenue of $23.7 billion was $200 million ahead of estimates. The first quarter revenue was also 5% above the revenue from a year ago.
While reviewing Bank of America’s latest earnings and comparing the bank with its closest peers, I find that Citigroup Inc. (NYSE:C) and Wells Fargo & Co (NYSE:WFC) have more robust capital bases. Also, in the past Bank of America has been in the news for the enormous litigation expenses that continued to hinder the growth in its bottom line. The situation was not very different this time around as well. Owing to this and other reasons mentioned in the remainder of the report, I prefer Citigroup over Bank of America Corp (NYSE:BAC).
Result Highlights
Among the result highlights were the Bank of America’s cost-cutting efforts, which paid off as the non-interest expense of approximately $18.2 billion were down $1 billion from a year ago. Besides, Bank of America was able to decrease its headcount to 262,800 from 278,700 in the prior year. The net interest income of $10.9 billion during the quarter decreased $11.8 billion from a year ago. The bank’s reported net interest margin of 2.4% declined 8 basis points (bps) over a year ago.
Financials
Bank of America’s fee income was 54% of total fourth quarter revenue, while the remainder was interest income. Interest income increased 3% sequentially, but remained 1.6% over the prior year. The year-over-year decline in the bank’s interest income was a result of lower loan balances and low interest rates. The surge in the fee-based income was a result of negative FVO adjustments on structured liabilities
Project new BAC & litigation expenses
Non-interest expenses of approximately $18.2 billion for Bank of America were down 5% over the prior year majorly due to Project New BAC. However, it was still above the linked quarter’s expenses. Bank of America expects total savings of $8 billion each year from its Project New BAC, which is an initiative aimed at reducing operating costs. This is $2 billion in cost savings each quarter. Despite the focus on expenses, the bank’s efficiency ratio remained elevated at 78.9%, compared to 97.2% at the end of the fourth quarter of the prior year.
During the quarter, Bank of America Corp (NYSE:BAC) incurred litigation expenses of $881 million, compared to $916 million during the linked quarter. Much of the costs are associated to a class action settlement between Countrywide and various other plaintiffs concerning toxic residential mortgage-backed securities.
As a result, Bank of America’s bottom line came in at $2.6 billion, up considerably from the linked quarter’s bottom line of $732 million.
Credit quality
Bank of America posted an increase in its credit quality. Its provision for credit losses decreased 22% to $1.7 billion. Further, the net charge-offs of $2.5 billion were up from the prior quarter’s $3.1 billion, while the net charge-offs ratio improved to 1.1%. Similarly, the nonperforming loans, leases and foreclosed properties ratio improved to 2.5% after the nonperforming assets decreased 3% sequentially.
Capital Position
Bank of America estimated Basel 1 Tier 1 capital ratio of approximately 10.6%, up 20 bps from the linked quarter. Its estimated Basel III Tier 1 common capital ratio is 9.4%, up 17 bps over the linked quarter. This proves that like its peers, Bank of America’s capital position continued to improve during the quarter.
Competition
Most of the money-center banks have already reported their first quarter performance for the current year. Citigroup Inc. (NYSE:C) and Wells Fargo & Co (NYSE:WFC) are Bank of America Corp (NYSE:BAC)’s closest peers, and both reported EPS beats of approximately 10.4% and 4.5%, respectively. Citigroup’s first quarter revenue was 3.2% ahead of estimates.
While Wells Fargo reported a slowdown in its mortgage originations during the quarter, JPMorgan Chase & Co. (NYSE:JPM) and Citigroup increase their originations during the period. Citigroup wrote 28% more home loans this quarter, compared to the prior year, while loan origination volume dipped 15.5% at Wells Fargo over the same time period.
What is more disturbing for Wells Fargo’s investors is the 9% sequential decline in the bank’s un-closed mortgage pipeline. This means you can expect Wells Fargo to report lower originations in the coming quarters.
Besides, similar trends of expense reductions and top-line pressure were visible throughout the banking sector’s latest disclosures. Citigroup and Wells Fargo estimated their Basel III Tier 1 common capital ratios at 9.3% and 8.4%, respectively.
The capital positions reveal that Citigroup is better positioned to survive the new law being drafted by legislators, which requires banks to hold up to 10% capital. Since Citigroup is already holding 9.3%, the law would not disrupt the bank’s regular operations that much.
Conclusion
Despite a renewed focus on expense management through NEW BAC, I believe Bank of America Corp (NYSE:BAC) needs to reduce its costs further. Compared to Wells Fargo and (NYSE:WFC) Citigroup, Bank of America has a more robust capital base. However, I would prefer to invest in Citigroup as it has captured market share in the US mortgage markets during such challenging times.
The article Bank of America Hit by Settlements originally appeared on Fool.com and is written by Adnan Khan.
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