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Is This a Reason for Bank of America Investors to Be Concerned?

By John Maxfield - May 26, 2016 at 2:15PM

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Bank of America is being less aggressive than its peers when it comes to preparing for darker times ahead.


Image source: Wikimedia Commons.

If you compare Bank of America's (BAC -0.28%) income statement to other multitrillion dollar banks, one thing sticks out: it's the least conservative of the nation's biggest banks when it comes to preparing for tough times ahead.

You can see this by looking at how much Bank of America sets aside each quarter in anticipation of future loan losses. Known as loan loss provisions, these added up to $997 million at the nation's second biggest bank by assets last quarter.

That's a lot of money. But it nevertheless pales in comparison to JPMorgan Chase (JPM -0.48%), Citigroup (C -1.30%), and Wells Fargo (WFC -0.15%). As you can see in the table below, these three banks set aside between $1.1 billion and $1.9 billion each in the first three months of 2016.

Bank

1Q16 Loan Loss Provisions

Allowance for Loan Losses

Allowance for Loan Losses as a Percent of Total Loans

JPMorgan Chase

$1.8 billion

$13.9 billion

1.66%

Bank of America

$997 million

$12.1 billion

1.35%

Wells Fargo

$1.1 billion

$11.6 billion

1.23%

Citigroup

$1.9 billion

$12.7 billion

2.07%

Data source: Quarterly earnings releases and financial supplements.

Bank of America's lack of conservatism in this regard is noteworthy for multiple reasons. The first is that it has one of the largest loan portfolios in the financial industry.

At the end of the first quarter of this year, Bank of America's balance sheet showed $901 billion in loans. That trailed Wells Fargo's $947 billion loan portfolio, but exceeded both JPMorgan Chase and Citigroup's, which came in at $847 billion and $619, respectively.

Based on size alone, then, one would be excused for concluding that Bank of America should be recording a larger quarterly loan loss provision than JPMorgan Chase and Citigroup.

This opinion is confirmed when you look at Bank of America's exposure to energy loans, which are experiencing higher default rates as oil and gas prices continue to pressure energy producers. As I noted here, the North Carolina-based bank has the second largest direct energy exposure of the nation's four biggest banks, second only to Citigroup.


Data source: Quarterly financial filings. As of 12/31/2015.

Moreover, it's not like Bank of America's previous provisions make up for the fact that it's currently doing less to prepare for future loan losses than its peers. If anything, in fact, just the opposite is true.

You can see this by comparing the four banks' allowance for loan losses, which is the total amount a bank has set aside via loan loss provisions in the past but hasn't used to cover loan charge-offs. At present Bank of America's allowance for loan losses adds up to $12.1 billion, or approximately 1.35% of its total loans. Only Wells Fargo's is less, at 1.23%, and it has a long-standing and well-deserved reputation for prudent risk management -- i.e., something that Bank of America lacks.

In short, this is an area that's worth watching for current and prospective Bank of America investors. While I believe that the $2.2 trillion bank's bargain-basement valuation offsets much of the risk associated with owning its stock, evidence that its management isn't being as aggressive when it comes to preparing for darker times ahead is something to keep an eye on.

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Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$32.26 (-0.28%) $0.09
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$47.21 (-1.30%) $0.62
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$115.82 (-0.48%) $0.56
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$40.18 (-0.15%) $0.06

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

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