(BAC) Bank of America Beats Expectations – Follows Sector Trend

Bank of America Corporation (BAC) reported second quarter earnings of 19 cents per share, marginally outpacing the Zacks Consensus Estimate of 15 cents. This also compares favorably with the loss of 90 cents in the prior-year quarter.

Results for the reported quarter were aided by improved non-interest income, substantial slowdown in provision for credit losses, reduced non-interest expense primarily due to the absence of the goodwill impairment charge and improved credit quality across most major portfolios. On the flip side was lower net interest income due to a weak interest rate environment.

Results for the quarter included certain special items – equity investment loss of $63 million, gains on the sale of debt securities of $354 million, net gains of $505 million from the repurchase of certain debt and trust-preferred securities, and negative fair value adjustments on structured liabilities of $62 million.

The company made significant progress in strengthening its balance sheet during the quarter, reflected by improved capital ratios. Record time-to-required funding and reduced long-term debt were among the positives.

Quarter in Detail

Fully taxable-equivalent revenue (net of interest expense) was $22.2 billion, up 65% from $13.5 billion in the prior-year quarter. However, revenue missed the Zacks Consensus Estimate of $22.8 billion.

Net interest income on a fully taxable-equivalent basis was $9.8 billion, down 15% from $11.5 billion in the year-ago quarter. Net interest yield decreased 29 basis points (bps) year over year to 2.21%. Reductions in consumer loan balances and yields as well as reduced investment securities yields were largely responsible for the downfall, which was partially offset by a reduction in long-term debt balance.

Noninterest income came in at $12.4 billion, up from $2.0 billion in the prior-year quarter, primarily due to significant reduction in the provision for representations and warranties.

Non-interest expense was $17.0 billion, down 25% from $22.9 billion in the year-ago quarter. The decrease was primarily driven by the absence of goodwill impairment charge, lower litigation expense and a reduction in mortgage-related assessments and waivers.

Book value per share as of June 30, 2012 was $20.16, compared with $19.83 as of March 31, 2012 and $20.29 as of June 30, 2011. Tangible book value per share as of June 30, 2012 was $13.22, compared with $12.87 as of March 31, 2012 and $12.65 as of June 30, 2011.

Credit Quality

With the gradual recovery of the economy, credit quality continued to improve during the quarter with net charge-offs declining across all major portfolios from the prior-year quarter. Provision for credit losses decreased 46% year over year to $1.8 billion. This is the lowest level since first quarter of 2007.

As of June 30, 2012, nonperforming loans, leases and foreclosed properties ratio was 2.87%, down 35 bps from the prior-year period. Net charge-off ratio decreased 80 bps year over year to 1.64%.

Capital Ratios

At the end of the reported quarter, the company’s Tier 1 common equity ratio was 11.24% compared with 10.78% at the end of prior quarter and 8.23% at the end of prior-year quarter. Tangible common equity ratio was 6.83% compared with 6.58% at the end of the prior quarter and 5.87% at the end of prior-year quarter.

As of June 30, 2012, the Tier 1 common capital ratio under Basel 3 was estimated at 8.10%. The company’s previous guidance was to achieve more than 7.50% at year-end 2012.

Competitive Landscape

BofA’s competitors –– JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) –– upheld the banking image with strong second quarter results primarily on the back of steady growth in mortgage lending businesses and lower loan losses.

Citigroup Inc. (C) and The Goldman Sachs Group Inc. (GS) also reported better-than-expected second quarter earnings despite revenue pressure. The results for both were aided primarily by cost cutting. For Citigroup, reduction in loan loss provisions was another contributor.

The mega banks have been reporting solid bottom-line results, yet the sector remains under pressure to deliver top-line growth due to weakness in the wider economy and fundamental pressures on the sector. However, reduced loss provisions and expenses helped these banks float.

Our Viewpoint

Through the sale of its non-core assets, BofA has been striving hard to improve its capital levels. This effort has resulted in success with respect to clearing the most difficult stress test (fourth round) conducted by the Fed.

Nevertheless, we believe that various revenue headwinds, elevated operating expenses and issues related to the regulatory changes will continue to impact the upcoming results.

Overall, the company is making every effort to keep itself afloat. Measures like realigning the balance sheet in accordance with regulatory changes, launching expense reduction initiatives and continuously improving asset quality vouch for better prospects.

The shares of BofA retain a Zacks #3 Rank, which translates into a short-term Hold rating. Also, we maintain a long-term Neutral recommendation on the shares.

Read the full analyst report on “BAC”
Read the full analyst report on “JPM”
Read the full analyst report on “WFC”
Read the full analyst report on “C”
Read the full analyst report on “GS”
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