Bank of America Corp (BAC): Understanding the Upside Potential of Its Earnings Engine

In concert with the decline in consumer loan balances mentioned above, these three income sources were also down year over year. However, service charges and investment/brokerage services were up as a percent of non-interest income.

Taken together we can again see both the impact of the macroeconomic factors (income down year over year) but also the impact of the changes in the company’s business model (the increase as a percentage of revenue at the bank).

Investment banking income was $5.3 billion, which is 12.4% of total non-interest expense. This was up 2% year over year. Equity investments were down 72% year over year, another indication of B of A’s simplification.

The Rosetta Stone – The Key to Bank of America’s Near-Term Future

Hidden away in non-interest income is what B of A reports as “Mortgage Banking Income.” This line item is the key to understanding the bank’s real upside potential. This is where the CountryWide legacy assets are reported.

This business is housed in B of A’s Consumer Real Estate Services business segment. This segment overall saw losses of $19.5 billion in 2011 and losses of $6.5 billion in 2012.

Drilling down another level, of those losses the CountryWide assets alone contributed a $20.1 billion loss in 2011 and a $7.4 billion loss in 2012. While the improvement from 2011 to 2012 is noted, these are still staggering figures.

But the company is proving that it can manage its way out of these assets. From 2011 to 2012, these legacy assets reduced 25% from $118 billion to $89 billion. This 25% reduction in assets resulted in a 63% reduction in losses year over year. Drilling down yet again, the total loans and leases in this portfolio reduced by just 16% from $65 billion to $55 billion. This 16% in problem loans and leases yielded a 63% reduction in the portfolio’s net loss for the year.

This is highly indicative that the worst for this portfolio is behind us. Bank of America has proven itself as capable of working these loans out of the bank at the same time as it has been able to reach settlements with the regulators.

This is evidence of steam still left in the engine.

An Oversimplified (yet viable) Conclusion