Say what you will about the quality of sell-side research these days, but scanning reports can at least give you a sense of how one side of the Street feels about a company. To that end, I'm a little surprised at the generally positive response to Bank of America's (NYSE:BAC) second quarter earnings. While it is true that credit and capital are slowly getting better, I see a lot of "core" issues that make me question the pace and extent of the bank's ultimate recovery.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

A Lot of Scary Numbers This Time Around
Bank of America reported a 10% sequential decline in operating revenue, with net interest income down about 11% on a 30 basis point decline in net interest margin. Fee income was also unimpressive, declining 9% sequentially despite solid performance in cards and mortgage banking. While the results from JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) made it pretty clear that this was not going to be a good quarter in investment banking, the 36% sequential decline in sales and trading was still pretty uninspiring.

While loan performance at large banks like Wells Fargo (NYSE:WFC), JP Morgan and Citi have been pretty iffy ((U.S. Bancorp (NYSE:USB) is an outlier in that respect so far)), Bank of America saw a 1% decline, with weakness in mortgage, card and commercial real estate. Although Bank of America has a long history of being a major player in mortgages, it looks like the company is losing ground to Wells Fargo, JP Morgan, U.S. Bancorp and others.

SEE: The Banking Industry In 2012

Credit quality was once again mixed. Reported non-performing asset and net charge-off ratios improved, but are still higher than those of most peers. What's more, the company saw another repurchase provision of nearly $400 million and saw claims leap to nearly $23 billion. Even if these claims are inflated (as management seems to suggest), it represents about 10% of shareholder equity and that's too large to just ignore.

What's the Real "Core"
I would suggest that America's prisons ought to consider forcing white collar criminals to read Bank of America earnings statements and then write reports on the statements; the company has a lot going on and has a duty to report it to shareholders, but it doesn't make for light reading.

SEE: Earnings Quality: Defining "Good Quality"

Because of all of the noise at Bank of America, analysts try to talk about the bank in terms of its "core" performance. For instance, many analysts try to downplay DVAs and focus on items like lower provisions and litigation charges to make the case that core performance at Bank of America is getting better.

That's fair enough, but I do worry about the company's loan weakness and shrinking deposits. While the FDIC deposit share data is unfortunately not really "real time" information, it looks like Bank of America is seeing erosion - both to large banks like U.S. Bancorp and JP Morgan, but to smaller regional and community players as well. My fear, then, is that all of the asset sales that Bank of America has had to do to shore up capital and all of the focus on the balance sheet may have meaningfully undermined the bank's core banking competitiveness.

SEE: Who Backs Up The FDIC?

The Bottom Line
The good news, such as it is, is that Bank of America continues to trade at a discount to tangible book value and one need only assume high single-digit returns on equity in the future to produce a reasonably attractive price target. I'd still advise caution though; while I have no doubt that a recovery in Bank of America could indeed reward patient shareholders, I'm still not certain that such a recovery is in the bag.

At the time of writing, Stephen D. Simpson has owned shares of JP Morgan (JPM) since January of 2006.

Related Articles
  1. Economics

    The 9 Industries Driving Texas' Economy

    Find out which industries are driving the Texas economy. Learn about the largest and fastest growing employers and producers in Texas.
  2. Stock Analysis

    Is Now the Right Time to Buy Brazilian Stocks?

    Examine the current state of the economy of Brazil, and learn why there may be some reasons for investors to look for a rally in Brazilian stocks.
  3. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  4. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  5. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  6. Investing Basics

    How to Think About Seasonality Trends

    Investors benefit when company research incorporates seasonality trends that predict relative strength and weakness throughout the calendar year.
  7. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  8. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  9. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  10. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  1. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  2. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  3. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  4. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  5. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  6. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!