Monday, January 27, 2014

BofA Says Profit Quadruples as Mortgage Costs Ebb- 01/21/2014

http://www.bloomberg.com/news/2014-01-15/bofa-says-fourth-quarter-profit-quadruples-as-mortgage-costs-ebb.html

7 comments:

  1. Revenue by operating segments:
    From company 10Q (consolidated quarterly revenue, 21.5B, net income 2.5B)
    Consumer&business banking 35%/71%, Consumer real estate services 7%/-40%, Global banking 19%/45%, Global markets 16%/ -31%, Global wealth&investment management 20%/29%, all others 4%/26%.
    Highlights
    - Core revenue generators are consumer&business banking and Global banking, all other segment is very volatile (4% of Rev/-64% of NI, same period 2012).
    - Total non-interest expenses as a % of revenue is down significant since 2008, currently around 30% of rev comparing with 70% in 2008.
    - Net charge-offs down from 1.86% of average loans and leases O/S to .73% in 3Q13, showing improved loans and leases quality. (p6)
    - Non-interest income increased yoy from 2012 to 2013, may came from IB/Wealth management segments.
    - Macro is flourish the financial industry with improved consumer confidence and increased interest rate, which means BOA can increase spread % between deposit and loans, and increase revenue from asset management segment.
    - TBV 157M (p19) yields a BV per share of $14.6, comparing with current Mkt price $16.86.

    Risks
    - Interest rate risks: affects deposit-taking and lending segments the most. a -50 bsp parallel shift costs 1.6B (p.133)
    - Litigation costs: legal costs and paying for faulty securities in 2008. It has to pay at least 8.5B to AIG for settlement, which costs 82 cents per share. It equals to the 90 cents TTM EPS. (http://seekingalpha.com/article/1936661-bank-of-america-will-continue-its-rise)
    - Regulation risk: weaken BOA's pricing power on consumer banking especially.

    Conclusion
    Great outlook, revenue grew significantly as the world financial markets improved, and the quality of loans was also enhanced, investment bank and wealth management are gaining revenue and contributes more in NI.

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  2. Intro--

    Bank of America Corporation accepts deposits and offers banking, investing, asset management, and other financial and risk-management products and services. The company has a mortgage lending subsidiary, and an investment banking and securities brokerage subsidiary.

    REVENUE BREAKDOWN—

    REVENUE REVENUE % NET INCOME NET INCOME %
    CONSUMER & BUSINESS BANKING $29,023.00 34% $5,321.00 127%
    CONSUMER REAL ESTATE SERVICES $8,759.00 10% $(6,507.00) -155%
    GLOBAL BANKING $17,207.00 20% $5,725.00 137%
    GLOBAL MARKETS $13,519.00 16% $1,054.00 25%
    GLOBAL WEALTH & INVESTMENT MANAGEMENT $16,517.00 20% $2,223.00 53%
    ALL OTHER $(790.00) -1% $(3,628.00) -87%
    $84,235.00 100% $4,188.00 100%


    The Durbin Amendments—

    The Federal Reserve adopted a final rule with respect to the Durbin Amendment, which became effective October 1, 2011, that established the maximum allowable interchange fees a bank can receive for a debit card transaction. The interchange fee rules resulted in a reduction of debit card revenue of approximately $1.7 billion in 2012 compared to a $430 million reduction in 2011. This means Bank of America loses pricing power in the debit card transactions and some related fees.


    Basel rule—
    Basel 3 Tier 1 common ratio was basically unchanged at slightly above 9% on Standardized basis as retained earnings were offset by decline in OCI from higher interest rates.

    Market Risk Management—
    1. Interest rate risk
    2. Foreign exchange risk
    3. Mortgage risk
    4. Equity market risk

    Positives—
    • Good progress on expenses as Legacy Asset & Servicing costs fell more than expected to $1.8 bil from $2.2 bil in the third quarter
    • Strong investment banking fee growth (34% qoq) and good trading results, both are better than peers.

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  3. Annual report 2012

    • Consumer & Business Banking sales: 34% profit margin: 18%
    • Consumer Real Estate Services 10% profit margin: -74%
    • Global Banking 20% profit margin:33%
    • Global Markets 16% profit margin: 8%
    • Global Wealth & Investment Management 19% profit margin: 13%

    The company's revenue declined at a compounded rate of 3.01% during 2008 - 2012, with an annual decline of 13.03% over 2011. In 2012, the company recorded a net profit margin of 4.18%, as against 1.26% in 2011.
    2013, 4Q’s results were strong with BAC raising its NII guidance and delivering $400m decline in LAS costs.4Q shows BAC’s asset sensitivity and mgmt’s ability to successfully deliver on promised expense saves.

    Opportunity:
    • QE3 boost the growth of the country’s economy.

    Risks of BOA:
    • Low interest rate environment
    • Basel III Norms on Capital Requirements

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  4. Segments:
    Consumer & Business banking: 32.17%; 61.08%
    Global Markets: 20.69%; 22.93%
    Global Wealth and Investment Mgt: 19.16%; 27.57%
    Global Banking: 17.63%; 46.12%
    Consumer Real Estate Service: 8.31%; -47.8%
    Other: 2.03%; -9.9%

    Net Rev 6.75% growth rate yoy and 15% growth in Q4
    Operating Profit: 59.86% growth yoy
    Net income: 1.7x

    Total deposits: 1.26% increase from 2012; total loans: 1.3% increase
    Net interest margin (net int income/rev): increase to 2.56% in Q4 from 2.44% in Q3
    ROE: 5.74%; Wells Fargo: 13.8%; JPMorgan: 10%
    Total debt (FY2013): 14.25% decreased; Total debt/EBIT: 35.65, 50% lower than 2012

    Profit Margin: 12.85%, 7% higher than 2012
    Citigroup: 15.13%
    JPM: 22.79%
    HSBC: 21.19%
    Wells Fargo: 27.15%

    Credit quality improved: 56% lower credit loss provision than last year

    Risk:
    Provision decrease can be short term profit generator but not the long term.
    Regulation and lawsuit. (BOA set 2.3B provision in Q4)

    Conclusion: overweight

    ReplyDelete
  5. Business Segment
    • Consumer & Business Banking 34% 18%
    • Consumer Real Estate Services 10% -74%
    • Global Banking 20% 33%
    • Global Markets 16% 8%
    • Global Wealth & Investment Management 20% 13%

    Comparison with peers (LTM) From Thomson Reuters
    • BOA 11.92% (Net Margin) 5.23% (ROE)
    • JPMORGAN 16.37% (Net Margin) 8.81% (ROE)
    • WELLS FARGO 24.84% (Net Margin) 14.66% ROE)
    • CITIGROUP 14.94% (Net Margin) 7.24% (ROE)

    Rocovery
    • For the full year, profit more than doubled; revenue Q4 14%
    • Q4 net interest income increased 4%
    • Q4 non-interest income jumped 28%
    • Consumer and business banking 36%
    • Global wealth and investment 35 %

    Reasons for recovery
    • Cost controlling strategy. The bank met its cost-reduction targets for 2013
    o Job elimination
    o Sell non-core business
    • Drop in its credit provision. The company benefited from reduction in allowance for loan losses

    Future development
    • Bank of America's mortgage-related problems are now behind it
    • Fed’s taper plans ; increasing interest rates
    • Bank of America’s well-diversified business model
    o trust and wealth management;cross-selling investment products;
    • Global Banking business; highest ever revenues; 9% ; the bank‘s advisory and underwriting desks

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  6. CORPORATE OVERVIEW

    6 business segment (Revenue %, Operating Profit % 2013)

    - Consumer & Business Banking 33%, 22%
    - Consumer Real Estate Services 9% (67%)
    - Global Banking 18%, 30%
    - Global Markets 20%,10%
    - GWIM (Global Wealth and Investment Management) 20%,17%
    - All Others 2%, 26%

    Consumer & Business Banking (Core Business)
    2 segments (Net Income %)
    - Deposits 24%
    - Consumer Lending 76%
    - Card Services is one of the leading issuers of credit and debit cards to consumers and small businesses in the U.S.
    - Total Revenue goes up 0.2% in 2013 comparing 2012
    - The number of active mobile banking customers increased 20 percent from 2012 Q4 to 14.4 million.

    Consumer Real Estate Service (Significant Loss)
    - Home Loan 3%
    - Legacy Assets & Services 97% of the total net loss

    - The net loss for Legacy Assets & Servicing decreased 1% from 2012
    - The company bought the mortgage lender, Countrywide Financial for $2.5 billion in 2008, and has recorded more than $30 billion losses from bad loans, mortgage-backed securities claims and lawsuits.

    Global Wealth and Investment Market (High Growth)
    - Merrill Lynch Global Wealth Management (MLGWM) 83%
    - U.S. Trust 7%
    - The net income for GWIM segment grow 32% from 2012

    FINANCIAL TRENDS

    - The total revenue in 2013 increased 6.7% from 2012 to 88 billion
    - Adjusted net interest income increased 4 percent in FY 2013
    - Non-interest income jumped 28 percent as costs eased for refunds to investors on defective mortgages.
    - Net charge-offs down 6% for average loans and leases in Q4 2013 showing improved credit quality.
    - The Basel 1 Tier 1 Common Capital Ratio rose to 1.5% in 2013

    INVESTMENT RATIONAL/RISK

    PRO
    - Efficient capital level
    - Improvement in credit quality
    - Improving capital market activity, lower credit costs, reduction in long-term debt

    Con
    - Net interest yield pressure
    - Significant exposure to Europe
    - Litigation Issue

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  7. Business Overview: (% of total revenue, % of net income in 2013)
    - Consumer & Business Banking:33%,58%
    - Consumer Real Estate Services:9%,-45%
    - Global Banking: 18%, 44%
    - Global Markets: 18%,14%
    - Global Wealth & Investment Management: 20%,26%
    - All Other: 2%,4%
    Main business and profit driver is consumer & business banking segment. Segment had 19% increases from 2012 in net income mainly driven by lower provision for credit losses, lower non-interest expense and higher revenue from higher interest income.

    Financial Overview:
    - 2013 Net income increased 173%, mainly caused by a 9% increase in non-interest income.
    - Credit Quality: Provision for credit losses decreased 56% to $3.5 b by 2013 year end. Net charge off ratio dropped to less than 1% at year-end. A very positive sign on the credit quality of BoA.
    - Liquidity and Capital position: The Basel 1 Tier 1 Common Capital Ratio rose to 11.19% from 11.06% in 2012 and the Basel 3 Tier 1 Common Capital Ratio rose 0.7% to 9.96%. Both were well above the regulatory requirements.
    - Efficiency ratio fell from 85.59% to 77.07%, net interest yield rose from 2.35% to 2.47%. Indicators of better performance

    Other Positives:
    - Macroeconomics: U.S. Economy slowly recovers and BoA total deposits grew nearly 4.4% year over year to as of Sep 30, 2013. Expected increasing interest rate may lead to a bigger interest income improvement. Increasing interest margin can be expected.
    - Cost-cutting program continuously save expenses & increase profit. Additional cost savings can be expected in 2014 as BoA continue to execute on both the Project New BAC and the legacy assets and servicing initiatives.
    - Global Wealth and Investment Management business continues to post some of the best returns in the industry with a pretax margin of 26.6%

    Concerns:
    - Litigation concerns regarding to the mortgage liability issues of its Countrywide Financial business
    - Expense cutting remains a short-term approach, operating expenses will remain high in the future

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