Bank of America Corp’s Heaping Pile of Garbage

This article is part of a series on the complete valuation analysis of Bank of America  (NYSE: BAC  ) . For Jordan's full analysis, click here.

It's no secret that Bank of America has a financial landfill in Countrywide. Now stashed quietly in a unit labeled Consumer Real Estate Services, this unit has been an absolute disaster for Bank of America.

Legacy assets cost a fortune
Bank of America has already paid more than $50 billion in litigation expenses stemming from its involvement in the housing bubble and subprime fallout. These costs almost exclusively flow through the company's Legacy Assets & Servicing unit, which includes Countrywide assets.

This chart sums up the cold, painful realities of Bank of America's Consumer Real Estate Services better than any:

Yes, CRES is one big money pit, but will it continue?

Putting a price on CRES
I'm hesitant to ascribe any value at all to CRES at all. In 2013, the company's non-legacy portfolio (what should be the "good stuff") generated a net loss of $118 million. The first quarter of 2014 wasn't any better, as losses tallied to $139 million on the non-legacy "home loans" portion of CRES. 

The elephant in the room, the legacy assets, generated a net loss of $4.8 billion after an income tax benefit of $1.8 billion. This was largely due to a $5.8 billion in expenses resulting from a settlement with the FHFA and additional funding of loss reserves for its legacy portfolio.

CEO Brian Moynihan has suggested that there is at least one more big settlement in the works. Big, at least for Bank of America, is likely in the range of $10 billion.

Furthermore, the non-legacy portfolio's profitability is leveraged to mortgage volume. Mortgage banking income fell to $178 million in the first quarter of 2014 from $697 million in the first quarter of 2013. Given that rising rates have effectively ended the easy money from a refinancing boom, I'm not convinced CRES's non-legacy unit can be profitable in the near future.

Thus, I'm valuing CRES at zero. While there is some value in the assets underlying the capital allocated to the business, from the standpoint of profitability, I see little to no reason to expect this to be a profit-generating unit for Bank of America in the immediate future. I'd prefer mark it to zero, and allow the company's equity contribution to cover losses.

All Other
Bank of America's "All Other" unit is a bit of a slush fund that contains everything from non-U.S. cards, to deposits, and mortgages. I call it a slush fund because Bank of America uses All Other to fill in the gaps of its other units -- Consumer & Business Banking, Global Markets, and Global Banking -- to meet regulatory guidelines. Bank of America's main banking units trudge on a small capital base afforded by the backstop of assets included in this unit.

I should point out that B of A's "All Other" isn't in the same league as its legacy mortgage portfolios. All other is a collection of performing, although modestly profitable, assets. However, much of the benefit of "All Other" can already be found in the robust profitability of its banking units. In the best case, I'd give All Other credit for the equity investments ($2.1 billion) that it has on the books. But, to avoid double counting, and to favor conservatism in valuation, I'll mark this unit at $0. 

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a dividend windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

For Jordan's full Bank of America analysis and total valuation number, click here.

Read/Post Comments (1) | Recommend This Article (4)

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.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2980598, ~/Articles/ArticleHandler.aspx, 9/3/2015 9:48:53 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jordan Wathen

"The liabilities are always 100 percent good. It’s the assets you have to worry about." - Charlie Munger

Today's Market

updated 32 minutes ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:01 PM
BAC $15.94 Up +0.09 +0.57%
Bank of America CAPS Rating: ****