Why Is Bank of America Corp Getting Slaughtered by Analysts?

Since the beginning of the year, analysts have cut their first-quarter earnings estimates for Bank of America by 83%.

Apr 8, 2014 at 8:00AM

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Here's a depressing piece of news if you're a shareholder of Bank of America (NYSE:BAC): Over the last four months, analysts have reduced their first-quarter earnings-per-share targets for the Charlotte-based bank by a whopping 83%, going from $0.30 per share at the beginning of the year down to $0.05 per share today.

According to The Wall Street Journal, estimates related to the majority of the nation's largest lenders started being slashed in February "amid mounting evidence that bank traders found fewer opportunities to make money in debt and currency markets and bond underwriting slumped."

"The easy money has been made on U.S. banks," a person at Manulife Asset Management told the Journal.

Company

Consensus Estimate (January 1)

Consensus Estimate (April 3)

Change

Wells Fargo

$0.94

$0.96

+2.1%

JPMorgan Chase

$1.50

$1.41

(6%)

Morgan Stanley

$0.66

$0.61

(7.6%)

Goldman Sachs

$3.90

$3.56

(8.7%)

Citigroup

$1.42

$1.17

(17.6%)

Bank of America

$0.30

$0.05

(83.3%)

Source: The Wall Street Journal.

Although Bank of America's shareholders may be relieved to know it isn't the only bank to have taken a hit, this doesn't answer the question of why the nation's second-largest lender by assets has fared so much worse than its peers. Indeed, even Citigroup (NYSE:C) wasn't downgraded as much, and it was the sole U.S.-based bank to have its dividend request denied by the Federal Reserve in last month's Comprehensive Capital Analysis and Review.

Fortunately, there's less to this than meets the eye. At the end of March, Bank of America announced it had reached a multibillion-dollar settlement with the Federal Housing Finance Agency over charges stemming from the sale of faulty mortgages.

The deal requires Bank of America to pay a total of $9.5 billion, split between $6.3 billion in cash and $3.2 billion for the repurchase of mortgage-backed securities. Together, these are expected to decrease Bank of America's first-quarter net income by approximately $3.7 billion before taxes. On an after-tax basis, that equates to $0.21 per share of common stock.

Thus, excluding the FHFA settlement, the average EPS target for Bank of America is down by a much more manageable 13%. While still lower, it isn't the unexpected bloodbath that the numbers might have otherwise suggested.

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John Maxfield owns shares of Bank of America. The Motley Fool recommends and owns shares of Bank of America. It also owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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