Bank of America (BAC 1.70%) stock is getting pounded for a second day in a row after the nation's second largest bank by assets failed to persuade investors that its first-quarter earnings performance warrants a higher valuation. At roughly halfway through the trading session, shares of the lender are lower by $0.35, or 2.97%.
At first glance, Bank of America's earnings appeared to be very good. Unlike JPMorgan Chase (JPM 1.44%) and Wells Fargo (WFC -0.26%), both its revenue and its net income appeared to advance on a year-over-year basis. Yet, once you strip out noncash accounting charges related to the value of Bank of America's debt, you find that its top-line figure actually fell by 8.4%.
The addition of Morgan Stanley's (MS 1.81%) earnings, released this morning, only fueled the negative sentiment toward bank stocks. While the investment bank ostensibly swung to a profit in the quarter, notching $984 million in earnings compared to a $94 million loss last year, it benefited considerably from the same accounting anomaly noted above. After normalizing for this, Morgan Stanley's profit actually decreased, going from $0.71 per share last year down to $0.61 per share this year.
A drop in fixed income trading, a mainstay of Wall Street profits, was a primary culprit for this trend across Wall Street. Goldman Sachs (GS 1.59%), the undisputed leader in this regard, saw FICC revenues decline by 7% on a year-over-year basis. And Morgan Stanley watched as its FICC sales and trading revenues drop from $2.6 billion last year to $1.5 billion this year.
To get back to Bank of America, after all is said and done, I believe the first quarter will ultimately go down in the books as a success. Were its earnings as good as, say, analysts had expected? No. The consensus estimate called for $0.22 per share in earnings, while Bank of America delivered only $0.20.
But at the same time, it made progress on a number of critical fronts. Among other things, the bank decreased its toxic third-party mortgage servicing portfolio, continued driving down expenses, and reached an important legal settlement with past purchasers of Countrywide Financial's mortgage-backed securities.
So, what does this mean for the stock going forward? It's impossible to say. What isn't impossible to say, however, is that Bank of America's fundamental business is improving -- if for no other reason than its progress on cleaning up legacy issues.
