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

Bank of America has beat estimates by reporting adjusted EPS of 35 cents for the quarter ended March 31 on the back of a better efficiency ratio

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

By Troy Kuhn on Apr 16, 2014 at 11:35 am EST

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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