Bank of America: From Sick Man to Star Pupil

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Better-than-expected earnings from Bank of America (NYSE: BAC  ) (more on this below) contributed to positive sentiment this morning, and stocks have made solid gains this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  )  up 0.47% and 0.59%, respectively, at 10:25 a.m. EST.

It looks like a case of reversal of fortunes (or reversion to the mean, for the mathematically inclined). In the aftermath of the financial crisis, Bank of America was one of two "sick men" among the top banks (the other being Citigroup). Meanwhile, JPMorgan Chase (NYSE: JPM  ) sailed through the crisis unscathed, without so much as a single quarter of losses. However, this morning, Bank of America reported fourth-quarter results that are outshining those of JPMorgan (and Wells Fargo).

On the headline numbers: B of A's earnings per share were $0.29, beating Wall Street's expectations for $0.26. Revenue (excluding accounting adjustments) of $22.3 billion also beat the $21.2 billion consensus forecast. However, you don't usually achieve a near ninefold increase in earnings on a 14% year-on-year rise in revenue.

If the explanation isn't on the revenue side, it must be on the cost side. Indeed, provisions for credit losses -- reserves the bank sets aside for expected loan losses -- fell to $336 million last quarter from $2.2 billion in the year-ago period.

B of A's investment bank performed strongly, with a 16% increase in global markets revenue (excluding DVA -- the debit valuation adjustment, an accounting adjustment for derivatives). That contrasts sharply with JPMorgan Chase, which saw fixed-income revenue remain flat while equity revenue fell slightly.

One cost that did rise at B of A: litigation expenses, at $2.3 billion against $1.1 billion in the third quarter and $2 billion in the fourth quarter of 2012. However, there is reason to believe that those costs will have peaked in 2013 -- one of the potential catalysts for a rerating of the shares this year. On Monday, I highlighted the case for both Bank of America and JPMorgan Chase, calling them "compelling large-capitalization names." The most recent numbers haven't dissuaded me and it appears that market agrees this morning: Shares of Bank of America and JPMorgan are up 3% and 1.8%, respectively, at the time of writing.

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