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5 Charts Reveal Bank of America's Breakout Quarter

By John Maxfield - Jul 15, 2015 at 8:35PM

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Bank of America finally reported the earnings that shareholders have been waiting for.

Bank of America's headquarters in Charlotte, N.C.

Bank of America (BAC 2.40%) hasn't emerged completely from its past troubles, but its latest quarterly performance shows that it's on the verge of doing so.

The nation's second-biggest bank by assets blew away expectations for the three months ended June 30, reporting (opens PDF) higher revenue, lower expenses, and its best earnings since the onset of the financial crisis in 2008.

As you can see in the five charts below, it was a breakout quarter virtually across the board for Bank of America.

1. Best pre-tax earnings since financial crisis
Anyone who has followed Bank of America's saga over the past few years knows it has struggled to report a profit. Since the beginning of 2009, it has either lost money or barely eked out pre-tax earnings in 10 out of 26 quarters.

It's still too early to say with certainty, but the most recent quarter could mark an end to this trend. From the beginning of April through the conclusion of June, Bank of America earned $7.5 billion before taxes, notching its best performance since the financial crisis.

2. Return on assets just under critical threshold
The objective of most banks is to earn at least 1% on their assets -- meaning their annualized earnings equate to 1% or more of their total assets. This is because a 1% return on assets typically corresponds to a 10% return on equity, and the latter is generally assumed to dictate whether a bank's shares trade for a premium or a discount to book value.

Bank of America hasn't come close to this threshold in the past seven years, but in the latest quarter its 0.99% return on assets finally brought the North Carolina-based bank to the precipice. The question now is whether it can build on the momentum and breach the threshold in the third or fourth quarter.

3. Expenses are finally normalizing
Bank of America has gone to great lengths over the past few years to reduce expenses. Through its Project New BAC initiative, the bank has trimmed $2 billion of quarterly operating costs. Its legal team has put tens of billions of dollars' worth of lawsuits and regulatory actions in the rearview mirror. And by disposing of noncore and legacy assets, it has emerged with a more streamlined business model.

It wasn't until the latest results, however, that shareholders could finally see the full fruits of these labors. The metric that captures this best is the efficiency ratio, which measures how much a bank must spend to generate each dollar of revenue -- lower is better. Great banks have ratios between 50% and 60%. But until now, Bank of America's was stubbornly in excess of 70% and not infrequently above 80%.

Thus, if there's one thing that shareholders in the $2.2 trillion bank should rejoice, it's the bank's 62.5% second-quarter efficiency ratio. This not only represents a dramatic improvement over the past, but it also positions Bank of America to compete more aggressively against peers like Wells Fargo and JPMorgan Chase.

Bank

Efficiency Ratio (Q2 2015)

US Bancorp

53.2%

Wells Fargo

58.5%

JPMorgan Chase

60.9%

PNC Financial

61%

Bank of America

62.5%

Source: Quarterly earnings releases.

4. Litigation expenses are at a four-year low
One of the main reasons Bank of America's expenses were so much lower this year than in the second quarter of 2014 was that its legal expenses dropped from $4 billion down to $200 million. This was the least amount of money spent by the bank on legal costs in the past four years; over that time period, its average quarterly legal write-off amounted to $2.1 billion.

5. B of A's "bad bank" is receding into the background
Since at least the 1980s, the standard operating procedure for a bank that finds itself with an abundance of toxic assets on its balance sheet is to segregate the assets into a newly created division, or "bad bank." From there, they can be disposed of efficiently without disturbing the bank's more promising operations.

While Citigroup was the first to do so following the 2008 crisis with its Citi Holdings subsidiary, Bank of America soon followed suit with its legacy assets and servicing unit. At its height, B of A's "bad bank" employed 41,800 people. As of the latest quarter, that figure is now down to 12,600. In short, if you want a proxy for Bank of America's progress in atoning for past managerial missteps, I believe this is the best one.

Bank of America: Going forward
The market's reaction to Bank of America's second-quarter earnings speaks for itself. At roughly halfway through the trading session, shares of the megabank are trading nearly 4% higher and are currently just under their 52-week high.

Can Bank of America parlay this into better profits going forward? That's the million-dollar question. After studying the bank's turnaround in the 1980s, I recently came to the conclusion that it could. But only time will tell if this latest quarter was indeed the turning point.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Wells Fargo. 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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