Please ensure Javascript is enabled for purposes of website accessibility

Bank of America: Still Stumbling

By Morgan Housel – Updated Apr 5, 2017 at 11:40PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Another ugly quarter, but it could have been worse.

When Bank of America (NYSE:BAC) CEO Ken Lewis announced his resignation earlier this month, many people asked: Would he have thrown in the towel two weeks before announcing earnings if those earnings were anything but terrible?

No, he probably wouldn't have. And for the most part, they were.                                      

The third quarter produced a loss of $1 billion. Factor in $1.2 billion in preferred dividends (most stemming from TARP payments to taxpayers), and common shareholders took a loss of $2.2 billion, or $0.26 per share. That compares to a profit of $1.2 billion, or $0.15 per share, in the same period last year (although year-over-year comparisons aren't entirely fair, because of the Merrill Lynch acquisition.)

As predicted earlier this week, improvements in default spreads on B of A's own debt did some damage. Contracting credit spreads led to a $2.6 billion writedown. "The market's improved view of Bank of America's credit cost the company," said Lewis. That's true, but these losses are simply the reversal of equally annoying gains posted earlier this year when spreads blew out. If the accounting community would come together and agree that this accounting rule, net-net, is maddeningly useless, we'd all appreciate it. Thanks.

Yet even before accounting charges, results made no one smile, especially when compared with the blowout earnings of JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS). Total provisions for credit losses hit $11.7 billion. An additional $2.1 billion was added to credit-loss reserves. Nonperforming assets increased to 1.51%, from 1.38%. The allowance for losses as a percentage of nonperforming loans and leases fell to 112%, from 116%.

These aren't terribly surprising figures: Every commercial bank -- including the commercial segment at JPMorgan -- is still slogging through credit losses. But B of A doesn't have the trading heft to make up for consumer-loan losses like JPMorgan does. And there's one area where B of A's lending book still lags behind the rest. Reserves for losses as a percentage of loans sits at 4%, compared with 4.7% for JPMorgan, and nearly 6% at Citigroup (NYSE:C). This might be fair if B of A's books were proportionally healthier than its peers, but in many areas, that's not the case.

If you dig for sunshine, you might find it in what looks like stabilization of credit card delinquencies, in both early and late stages. Thirty-day-plus delinquencies fell 29 basis points, and 90-day-plus fell 45 basis points. This is somewhat contradictory to a Moody's report, which showed that early-stage delinquencies rose in August for the industry as a whole.

Whether that quarterly trend is sustainable remains to be seen. But even a diehard banking bear like me has to admit: If those delinquency stabilization trends hold up, you'll start seeing legitimate earnings power before long. How much earnings power? That's the real question.

What do you think? Is the worst behind B of A? Are shares a buy at these levels? Let me know in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Moody's is a Motley Fool Stock Advisor recommendation, as well as a Motley Fool Inside Value selection. The Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.73 (-2.37%) $0.77
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$44.26 (-2.90%) $-1.32
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$109.14 (-1.86%) $-2.07
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$301.97 (-3.50%) $-10.95

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.