Shares of the nation's second largest bank by assets, Bank of America (BAC 3.35%), are down today despite robust evidence that the labor market is continuing to heal faster than expected -- though still not fast enough. With roughly two hours left in the trading session, B of A is lower by $0.22 a share, or 1.8%.
According to data from the Labor Department, employers added 236,000 jobs in February, far surpassing the 160,000 figure that economists surveyed by The Wall Street Journal had predicted. As a result of the gains, the official unemployment figure ticked down two-tenths of a percent to 7.7%. This is the lowest level since the end of 2008.
While this news fueled shares of B of A and other blue-chip companies to open higher, the former has since been left in the dust by the latter, as the Dow Jones Industrial Average has maintained its positive momentum. The primary impetus for B of A's subsequent decline appears tied to its performance in the Federal Reserve's 2013 stress tests, the results of which were released yesterday after the closing bell.
At first glance, the news appeared to be all good for the megabank. After making its way through the Fed's economic gauntlet, B of A's Tier 1 common capital ratio emerged at 6.8%. This was below the 11.4% where it started but, more importantly, well above the 5% figure required by the Fed -- and also above the 5.7% post-test figure recorded by B of A last year.
"Although an improvement of roughly 110 basis points may seem insignificant," Motley Fool banking analyst David Hanson said yesterday, "the test results validated [CEO Brian Moynihan's] mission to return to this year's tests as a stronger bank."
A more thorough examination, however, raises at least one red flag. That is, according to the Fed's analysis, B of A's net income between the fourth quarter of last year and the end of 2014 would come in at a negative $51.8 billion. That's right. A loss of $51.8 billion! That's the worst nine-quarter loss of any of the financial institutions tested.
Two things are worth nothing in this regard. First, the Fed's scenario is both hypothetical and extreme. It assumes, among other things, that the U.S. unemployment rate will go up to 12.1% in the second quarter of next year. While this is certainly possible, it isn't probable. As the Fed itself noted, the designated rate is "above any level experienced over the last 70 years."
And second, B of A's internal evaluation turned out a considerably different result. While the Fed estimated its pre-provision net revenue to be only $24.1 billion over the relevant time period, B of A's estimate came in at $38.5 billion. The net effect was an increase of $8 billion in the bank's nine-quarter earnings. Suffice it to say, this still resulted in a loss, but the loss was considerably smaller than that estimated by the Fed.
Ultimately, it's still too early to make any final conclusions about how B of A fared in this year's stress tests, as the final piece of the puzzle comes next week, when investors learn if the bank can raise its dividend. Multitudes of analysts have predicted over the last few days that it will be given the necessary go-ahead from regulators to do so. At the same time, however, there's little point in speculating now, as we'll know the answer to this question in less than a week. In the meantime, investors will likely have to continue braving the increased volatility.
