What Bank of America's earnings since the financial crisis have felt like to investors. Image source: iStock/Thinkstock.
Bank of America (BAC 1.24%) has come a long way since the financial crisis. A very long way.
Eight years ago, people were justifiably wondering whether it would even survive the fallout from the Lehman Brothers bankruptcy.
Credit markets froze. Large swaths of credit card holders began defaulting on their monthly payments as unemployment surged. And then, of course, there was the implosion of the subprime mortgage market, which Bank of America was uniquely exposed to as a result of its 2008 acquisition of Countrywide Financial.
All told, Bank of America estimates that the crisis cost it nearly $200 billion, split between loan write-offs, litigation expenses, legal fines, and settlements.
Indeed, had it not been for a $45 billion injection of capital from the federal government, under the auspices of the TARP program, there's every reason to believe Bank of America wouldn't be around today.
But that's all in the past now, and nothing demonstrates this better than the following chart, a version of which Bank of America's Chairman and CEO Brian Moynihan shared this week with analysts at the 2016 Goldman Sachs U.S. Financial Services Conference.
Data source: Bank of America. Chart by author.
The thing to note in the chart is how much less volatile Bank of America's earnings have been since the beginning of 2015.
Throughout 2010 and 2011, they were all over the place. In the third quarter of 2010, Bank of America wrote off $10.4 billion worth of goodwill related to its credit card business, which translated into a $7.3 billion loss for the company overall. A year later, in the second quarter of 2011, Bank of America incurred an $8.5 billion charge to settle claims from private institutional investors who had bought Countrywide-originated mortgages.
While the fluctuations then began to moderate, the bank's bottom line from the end of 2011 through 2014 nevertheless continued to oscillate between mediocre and dismal, if not actual losses.
This changed in 2015, when Bank of America appeared to turn a corner and put the financial crisis in its rearview mirror. It was at that point that Bank of America's earnings regained a degree of stability.
This is important for the bank's investors because it means they'll be subjected to less volatility in its stock price. It also means Bank of America is in a much better position to ratchet up the amount of capital it returns to shareholders by way of dividends and stock buybacks.
To be clear, Bank of America is still short of its own profitability target. Its return on tangible common equity last quarter was 10.3%, which is below its 12% goal. But with interest rates on the rise, which will boost Bank of America's profitability, and with a more stable earnings base in place, there are plenty of reasons for the bank's shareholders to be confident that it's headed in the right direction.
