Bank Of America Still A Long Way From Normal

By Ryan C. Fuhrmann | April 25, 2011 AAA

The credit crisis hit the bank industry very hard, but although the public has largely put this financial debacle behind them, many banks are far from recovery. Bank of America's (NYSE:BAC) book value, or assets minus liabilities, remains below the level it reported in 2004, demonstrating the damage the credit crisis inflicted on its businesses. And, while many of Bank of America's operating units reported improved performance during the first quarter, it will likely be a long time before the company is able to put its mortgage woes behind it. Let's take a look at BAC's Q1 results. (For background reading, see Top 5 Signs Of A Credit Crisis.)
TUTORIAL: Understanding The Credit Crisis

Bank of America's First-Quarter Recap
Reported revenues declined 15.9% to $26.9 billion as deposit revenue from overdraft fee restrictions fell, credit cards suffered from lower interest rates, dismal trends in mortgage volumes continued, and commercial and global banking softened. The only segment to post a top-line increase was global wealth and investment management as a strong stock market increased investment management fees from the asset management group and Merrill Lynch brokerage unit. Brokerage rival Charles Schwab (Nasdaq:SCHW) is also benefiting from the recovery in financial markets, as are pure-play rivals Piper Jaffray (NYSE:PJC) and Raymond James (NYSE:RJF), and all have share prices close to their highest levels over the past year.

Net income declined 38.6% to $1.7 billion, or 17 cents per diluted share, to fall well short of analyst expectations. Bank of America ended the quarter with $31.6 billion in nonperforming loans and took a $3.8 billion provision charge for credit losses. This was down significantly from the $9.8 billion it reserved in last year's quarter, but reflected continued struggles in the consumer real estate unit and from the Countrywide financial operations that were acquired at the height of the credit crisis.

In term's of BAC's outlook, analysts currently project full-year revenue will decline a couple of percent to $107 billion and recurring earnings will reach $1.27 per share for year-over-year growth of approximately 47.7%.

The Bottom Line
Bank of America's book value ended the quarter at just over $21 per share. However, tangible book value, which excludes goodwill and other intangible assets on the balance sheet and is meant to more accurately reflect the value that would be left over for shareholders if the company was forced to liquidate, was $13.21, or right about where the stock is currently trading.

This means that investors are currently placing little value on the bank's going concern value, which is valid given it will likely cost billions to resolve the bad mortgage loans on its book and related regulatory accusations. The same can be said for arch rival Citigroup (NYSE:C) and regional rival Regions Financial (NYSE:RF). However, within a couple of years, B of A should be able to report between $2 and $3 in normalized earnings as returns on equity return to the 10-15% range. Current shareholders hope things return to normal much sooner, but there are few signs that the U.S. housing market has entered a recovery mode. (For related reading, also take a look at Analyzing A Bank's Financial Statements.)

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