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Litigation Expenses Take A Toll, But Bank of America’s 1QFY14 Results Beat Estimates

Litigation Expenses Take A Toll, But Bank of America’s 1QFY14 Results Beat Estimates
By: Troy Kuhn
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Bank of America Corp (BAC) has announced its financial results for the first quarter of its 2014 fiscal year (1QFY14; ended March 31, 2014). The company has reported revenues of $22.8 billion for the quarter, topping analysts’ expectations by $420 million, and adjusted earnings of 35 cents a share (EPS), above analysts’ estimates of 27 cents. Its efficiency ratio improved 11 percentage points over the preceding year to 71.82%, supporting expansion in the company's bottomline. However, it reported a diluted loss of 5 cents a share after accounting for litigation expenses worth $6 billion (approximately 40 cents per share).

Bank of America’s revenues were down 1.2% year-over-year (YoY) as its net interest income had declined 5.4% YoY to $10.29 billion and non-interest income had fallen 0.4% to $12.48 billion. At the close of 1QFY14, deposit balances were up $38 billion from the same period last year to a record $1.13 trillion. The bank also issued more than a million new credit cards during the quarter.

Bank of America’s Global Wealth and Investment Management segment reported record asset management fees of $1.9 billion and a pre-tax margin of 25.6%. The segment’s assets under management increased 13% YoY to $841.8 billion, and its total revenues increased 2.9% to $4.55 billion.

The Consumer & Business Banking segment’s revenues fell 1.2% over last year to $4.95 billion in the quarter. However, the segment’s net income had increased 14.5% to $1.66 billion in the quarter on lower provisions for credit losses and noninterest expenses. These also helped the segment improve its efficiency ratio by 2.61 percentage points to 53.46%.

The Consumer Real Estate Services segment’s revenues declined 5.6% YoY to $701 million, and the segment reported a $5 billion loss for the quarter compared to the $2.16 billion loss reported for the same quarter a year earlier. Mortgage originations were down 65% YoY, which, according to the management, was a result of declining demand for refinance mortgages.

The Global Banking segment saw revenues rise 6.6% over the last one year to $2.3 billion in 1QFY14. In the same time-frame, the segment’s net interest margin narrowed 0.5 percentage points to 2.68% and its efficiency ratio deteriorated 1.8 percentage points to 47.5% in the quarter. The higher efficiency ratio was behind the 3.5% YoY decline in the segment’s net income, which totaled $1.24 billion for the quarter.

The fixed income, currency, and commodities business saw revenues decline 2% YoY to $3 billion in 1QFY14. The management said that the decline was attributable to a decline in rates and currencies.

Litigation expenses were the main setback for the company in the quarter. They swelled from $2.2 billion last year to a massive $6 billion during the period. Bank of America Chief Executive Brian Moynihan said “The cost of resolving more of our mortgage issues hurt our earnings this quarter.”

Bank of America reached a settlement with bank regulators earlier this month to pay $772 million in fines and refunds for its deceptive credit card practices. The company also settled with the Federal Housing Finance Agency last month for $6.3 billion in cash and bond buybacks worth $3.2 billion to resolve a dispute over mortgage securities sold to Fannie Mae (FNMA) and Freddie Mac (FMCC).

Bank of America is trading at a one-year forward price-to-book value multiple of 0.8x, which is a discount of 23% to its competitors’ average. The second-largest bank in the US by assets is trading at a price to tangible book value multiple of 1.2x, a discount of more than 9% to the industry’s average.

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