Bank of America: An Expected Hit is no Cause for Concern

A $6 billion litigation expense shouldn't cloud Bank of America's progress.

Apr 16, 2014 at 10:15AM
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U.S. stocks opened higher on Wednesday, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.36% and 0.49%, respectively, at 10:15 a.m. EDT. This is a big day for technology sector earnings, with Google and Dow component IBM reporting after the market close; I'm particularly eager for the former in the wake of yesterday's strong results from Yahoo!. This morning, however, the focus is on banks, with Bank of America (NYSE:BAC) and US Bancorp having announced their first-quarter results before the market open.

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It's not a surprise, but Bank of America's earnings were again swamped by litigation expenses -- in this instance, $6 billion covering a $3.6 billion settlement with the Federal Housing Finance Agency, and "additional reserves primarily for previously disclosed legacy other mortgage-related matters" making up the balance.

The upside for traders is that this expense was not unexpected, so it should have essentially no bearing on short-term price action. However, there appears to be some confusion in the financial media concerning what the "adjusted" earnings per share ought to be -- and, thus, whether BofA beat or missed the analyst estimate. The bank's reporting does not make it particularly easy to sort out what is what.

By my reckoning, Bank of America missed Wall Street's expectations on EPS, but beat the estimate for revenue by 3% with $22.8 billion (there is no fudging revenue, at least). Happily, the bank increased revenues in all five of its major business lines (though I note that fixed income, currency and commodities sales, and trading revenues fell 15% year over year on a like-for-like basis, which is comparable to the decline reported by its closest peers, JPMorgan Chase and Citigroup.)

For investors, moreover, the litigation charge is another step toward burying any and all outstanding liabilities relating to the credit bubble and crisis -- this has been a long road, but we're beginning to see the end.

Where does that leave investors? On a valuation basis, Bank of America's book value per share and tangible book value per share did not budge by more than a few cents in the first quarter, so we're still looking at shares that are priced (as of yesterday's closing price) at roughly a 20% discount to their tangible book value and a 20% premium to their book value. On either measure, I think they are conservatively valued. Bank of America is still in repair mode, but the underlying franchise is solid and ought to provide shareholders with decent returns from current levels.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. 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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