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