Bank of America's Still Using Smoke and Mirrors

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It's frustrating when a company announces earnings screaming that it "exceeded expectations" or "beat analyst estimates," when in fact one-time events drove the results.

To make matters worse, we're often forced watch the stock jump on such announcements. That's why the stock movement of Bank of America (NYSE: BAC  ) these past couple of days has been so refreshing. The bank has done the smoke-and-mirrors thing before, but it didn't get away with it this time.

The highlights
According to CEO Brian Moynihan, Bank of America was a bank firing on all cylinders in Q2. The long list of positives was proof the "New BAC" was right on track. Some of the more notable highlights included a profit for the quarter of $2.46 billion, compared with a nearly $9 billion loss in Q2 of last year. Oh, and there's more: Total revenue jumped a whopping 66% versus last year, to nearly $22 billion.

The mortgage lending unit also showed improvement, losing $768 million versus $1.1 billion last quarter, and $14.5 billion for all of 2011. Long-term debt declined significantly too, down $53 billion from last quarter on "maturities and liability actions." In other words: "Look what we did!"

Small-business lending jumped, as did average deposits for consumers and businesses.

Investment banking, according to Moynihan, was also a bright spot the first half of this year. The unit is now ranked No. 2 in fees generated, another feather in the cap.

That's all good stuff, of course, and often this would be the kind of thing that would push a stock price higher. And it did initially, but to the credit of investors everywhere, you chose to look beyond the headlines. Unfortunately for Bank of America shareholders, there wasn't much substance under all the PR.

The lowlights
Out of the gate, the growth to $2.46 billion profit, equal to $0.19 a share, was hogwash in a number of ways. Last year's loss of $0.90 a share came after a massive $1.23 a share mortgage-related expense. Some quick math suggests the bank actually earned $0.33 a share in Q1 of 2011 once that charge is removed. This past quarter's profit already loses a bit of its luster.

To make matters worse, what profit there was in Q2 of this year was due in large part to the huge drop in provisions needed for poor-quality loans. Bank of America set aside nearly $1.5 billion less than last year, and all that falls right to the bottom line.

That jump to No. 2 in the investment-banking rankings? The unit actually produced 29% less in fees compared with the year-ago quarter, and trading revenues were down as well. Of course, B of A is hardly the only institution finding it hard to generate investment-banking revenues, but the "No. 2 ranking" headline would suggest otherwise.

When it's all said and done, the investment community got this one right. Bank of America is still climbing its way out of the massive hole it dug itself into years ago, even as other banks are finding light at the end of the tunnel.

Better alternatives
I've said it before and I'll say it again: Wells Fargo (NYSE: WFC  ) is hands-down one of the best investment options in the industry. It almost seems cruel to compare the two banks -- but let's do it anyway. Return on assets and equity in the banking industry are sound measures of how well a bank is running its business. What the institution does with the money consumers give it is the ultimate litmus test.

Bank of America's lowly 0.07% return on assets and 0.04% return on equity is just a smidgen off Wells Fargo's operating results. At 1.41% and 12.86%, respectively, Wells' results in these two key areas puts most the big banks to shame. The only one close is JPMorgan Chase (NYSE: JPM  ) , but it has other problems. The strong exposure to and reliance on capital markets to drive revenues exposes JPMorgan investors to a measure of risk Wells shareholders don't have to contend with.

Why? Because Wells continues to produce outstanding results -- just as it did during the recently announced Q2 earnings call -- by growing traditional banking lines. The overall portfolio and core deposits grew quarter over quarter, Wells is buying back shares, and it pays a 2.6% dividend. What's not to like?

Well done, folks. You'd like to think the last couple of days of trading would wake some people up over at Bank of America. We're not falling for the smoke and mirrors anymore. Start generating some real results in your core banking business, and we'll take notice. Until then, I'd stick with Wells Fargo.

We've touched on but a few of the investment options available in the banking and financial sector -- a sector, by the way, that has the likes of Warren Buffett standing up and taking notice. Sure, you can search all over creation for more options, or just take a look at our special free report "The Stocks Only the Smartest Investors Are Buying."

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool owns shares of JPMorgan Chase and Bank of America. Motley Fool newsletter services have recommended buying shares of Wells Fargo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (1)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2012, at 7:38 PM, MKArch wrote:

    A. Did you write articles last year proclaiming BAC's earnings were better than headlines because of the massive one time write off? Did you write articles when BAC was adding to provisions saying earnings would have been better without them?

    B. How much are you paying for Wells best in class story vs. BAC's turn around story. My bet is BAC's return to investors from todays price will trounce WFC's return even if WFC is still somewhat of a bargain.

    To be sure BAC has issues they are dealing with but it's priced like it's going out of business. The most credible analysis I've seen regarding the most significant issue facing BAC in the mortgage put backs suggest they can handle them with modest dilution if any is needed and they will be paying these off over the course of years. The downside to BAC seems to be way more than accounted for in it's 1/3 of book value market cap. BTW one the primary investors objecting to their MBS settlement last year just dropped their opposition.

  • Report this Comment On July 23, 2012, at 7:45 PM, MKArch wrote:

    FYI forgot to add I'm referring to long term return of BAC vs WFC.

  • Report this Comment On July 24, 2012, at 2:28 AM, xnicholas wrote:

    I think everyone should sell bank of america immediately! I will gladly buy all of them for a dollar a share.

    Please sell me your shares at one dollar per bank of america share... before the stock goes bankrupt. Bank of America could go bankrupt instantly considering it just made 2.5 billion dollars.


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