Why Bank of America Stock Soared in 2013


Photo by Hidehiro Kigawa.

Editor's note: A previous version of this article gave an incorrect figure for the number of layoffs in Bank of America's mortgaging division.

If you're an investor in Bank of America (NYSE: BAC  ) , then you probably feel pretty good right about now. Shares of the nation's second largest bank by assets have increased by nearly 30% since the beginning of the year. While this is in line with the industry, as the KBW Bank Index (DJINDICES: ^BKX  ) is up by a nearly identical margin, it's nevertheless vindication for investors' faith in the Charlotte-based lender.

Bank of America's progress through the first nine months of 2013 has been broad based. Its net income more than doubled on the heels of higher revenue, lower loan loss reserves, and increased efficiency. Credit quality continued to improve, with net charge-offs falling by nearly half from the year-ago period. And the bank's capital ratios have stayed relatively consistent, albeit at a more-than-adequate level.

Metric

9 Months
Ended 9/30/2013

9 Months
Ended 9/30/2012

Net income

$7,992

$3,456

Efficiency ratio

76.22%

82.23%

Net charge-offs

$6,315

$11,804

Tier 1 common capital ratio

11.08%

11.06%

Source: Bank of America 3Q13 10-Q.

These trends largely explained Bank of America's success in this year's comprehensive capital analysis and review process, or CCAR. After learning its capital plan had been approved by the Federal Reserve, the bank announced its decision to repurchase $5 billion in common stock and $5.5 billion in preferred stock. 

Of all its accomplishments throughout the first nine months of the year, two are particularly notable.

In the first case, it continued to execute on its expense initiatives. By optimizing its branch network, reducing head count, and recording fewer costs associated with litigation, Bank of America was able to get its efficiency ratio down to 76%. This is still a far cry from the 50% to 60% level that's ideal, but it's nevertheless a marked improvement over the same period last year, during which operating expenses ate up more than 82% of the bank's net revenue.

More specifically, it aggressively attacked expenses related to the servicing of legacy mortgages -- a festering wound in Bank of America's side since the financial crisis. Both the number of loans serviced for third-party investors and the number of delinquent loans were sliced in half on a year-over-year basis. Bank of America was accordingly able to reduce its headcount in the division by 26,000 employees, or 45%.

The second accomplishment concerns litigation, though Bank of America's success in this regard certainly isn't unqualified.

While the bank inked important settlements with both MBIA and Fannie Mae earlier in the year, it was later found guilty of defrauding the government and remains embroiled in a legal dispute over a 2011 agreement with Bank of New York Mellon and 22 institutional investors in securities backed by Countrywide-issued mortgages. Moreover, in the aftermath of the historic JPMorgan Chase settlement, it remains to be seen how aggressive the U.S. government will be in pursuing additional damages from Bank of America.

But for any of you that have followed Bank of America's legal drama, it's still hard not to conclude that it made considerable progress on this front. For its part, the BNY Mellon dispute will soon be resolved -- or, at least, hopefully -- as closing arguments concluded earlier this week. In addition, rumors have begun circulating that it's in the final stages of securing a resolution with Freddie Mac that mops up any remaining issues between the two mortgage giants.

This leaves the securities fraud actions, headed up by the FHFA and AIG, as the principal outstanding legal disputes dating back to the financial crisis. 

At the end of the day, I'll be the first to admit that Bank of America has a multitude of challenges it needs to address next year. But for the time being, there's no reason its shareholders (including myself) can't revel in a bit of good fortune.

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Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

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 November 22, 2013, at 6:52 PM, Treeboypirate wrote:

    Reduce head count by 26 million employees ... I knew it was a big bank.

  • Report this Comment On November 22, 2013, at 7:19 PM, fromscottstreet wrote:

    I thought so too. No wonder unemployment is so high in the US. Obama must hate BAC!

  • Report this Comment On November 22, 2013, at 10:26 PM, JohnMaxfield37 wrote:

    Sorry about that!

    I meant 26 thousand.

    We'll get it fixed!

    John

  • Report this Comment On November 23, 2013, at 8:57 AM, jimmybox wrote:

    Why BofA soared in 2013: a Fed-induced bid for risk assets.

    S&P 500 is up 25.25% YTD. With a beta of 2.3, BAC is up nearly 30%. With a volatility more than twice that of the market, BAC's performance has barely surpassed it. On a risk-adjusted basis, it's performed terribly.

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