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Bank of America (NYSE: BAC) May Never Fully Recover
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Bank of America (NYSE: BAC) May Never Fully Recover

By Diane Alter, Contributing Writer, Money Morning • April 19, 2012

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Bank of America (NYSE: BAC) has been working hard to regain its profitability and stature, but a better-than-expected earnings report isn't enough.

On Thursday the company reported earnings of 3 cents a share. Revenue came in light at $22.28 billion.

Although analysts were looking for 12 cents a share, several weighed in saying that a $4.8 billion charge known as debt valuation adjustment (DVA) complicated the earnings report. Some say BofA actually beat core earnings expectations.

Evercore analyst Andrew Marquardt wrote, "Our initial view of core is closer to 26 cents."

Return on average equity of 11.05% beat fourth-quarter results, but was less than the 15.41% return the bank posted for the first quarter a year ago. BAC succeeded in reducing its credit-loss provisions to $2.42 billion from $3.81 billion in the fourth quarter.

"You had very favorable tailwinds in the fixed-income markets and so trading revenues are very strong for this universe right now," Charles Peabody, an analyst at Portales Partners LLC in New York, said in a Bloomberg Radio interview. "There's no question the earnings that are being reported are very good -- the question is the sustainability."

Despite beating estimates with its first-quarter earnings, BofA has struggled more than its counterparts in the wake of the financial crisis. The damage may be too much to allow the bank to grow to as big as it once was.

How Bank of America (NYSE: BAC) Veered off Track

Bank of America has been trying to get back on track after suffering through a couple of trying acquisitions and financial crisis years that left the company beat-up.

Bank of America's roots can be traced back to 1904. The storied bank truly had humble beginnings, priding itself on catering to immigrants who were denied service from other banks.

It has since grown into one of the most recognized companies in the world. BAC serves clients in more than 150 countries and has a working relationship with 99% of U.S. Fortune 500 companies.

In 2008, BAC acquired Merrill Lynch, making it the world's largest wealth management company, and a major player in investment banking.

It is difficult to pinpoint the exact and pivotal moment that marked a stark and steady decline for BAC, and tarnished its once stellar reputation, but the acquisition of Countrywide Financial is a good place to start.

The $4.1 billion deal was announced on Jan. 11, 2008, and completed in July 2008. In March of that same year, the FBI embarked on an investigation into Countrywide for possible fraud relating to home loans and mortgages.

The acquisition was widely viewed as staving off a potential bankruptcy for Countrywide. The combined units of BAC and Countrywide made BAC the leading mortgage originator and servicer in the U.S., controlling some 20-25% of the home loan market.

But the co-joining was anything but smooth sailing, and weighed heavily on BAC's earnings, revenue, bottom line and character.

Then in January 2009, during the height of the Great Recession, BAC received $20 billion in federal bailout money. This was on top of the $25 billion given to the bank in the fall of 2008, as part of the deal with the government to preserve the merger with ailing Merrill Lynch. Things following went to bad from worse for BAC and others in the industry.

By 2011, BAC had slipped to No.83 onthe Forbes list of the world's biggest public companies from No.3 the year before.

In December of last year, the Justice Department announced a $335 million settlement with BAC over discriminatory lending practices at Countrywide Financial. This, from the fabled bank created to do just the opposite.

BAC Tries to Turnaround

BAC has been doing everything in its power to regain its stature, return to profitability, shed debt, and appease shareholders. It has been selling assets and raising billions in the last year alone. It also announced a major restructuring which will slash thousands of jobs.

The bank did complete a major hurdle by passing the stress test this year, but BAC has yet to reward shareholders with a dividend boost, which several of its counterparts have done. BAC may well be holding on to cash to pad its pockets with capital ahead of new banking requirements.

Over the last two quarters in fiscal 2011, BAC boosted revenue 4.6% to $29.68 billion in the final quarter, and 4% in the prior quarter.

Analysts' opinions are also improving, with 17 of 23 maintaining a "Hold." Meanwhile, "Buy" ratings have inched up a bit since the start of the year.

But a major uncertainty factor is that the bank is the largest player in the mortgage lending arena. Housing prices continue to wane and employment numbers remain a far cry from healthy, leaving BAC, and its cohorts, vulnerable to weakness and earnings misses in the months ahead.

Another looming concern for U.S. banks is due to the "Volcker Rule," with its ban on trading the markets with house money. Consider that BofA's Global Banking and Markets group raked in a profit of $3.2 billion in the first quarter of 2010 from its trading operations. If the Volcker Rule were strictly enforced, those profits would simply vanish.

And the damage to BoA's reputation has driven away customers - like Money Morning's Keith Fitz-Gerald. BAC told Fitz-Gerald, a customer of the bank for years, that it would take three to four months for him to speak to an agent about refinancing his home mortgage. That means he would have to stick with a higher rate for longer than he cared to.

Meanwhile, the bank was more than happy to talk to him right away about taking out an additional loan.

"Through its actions, Bank of America demonstrated that it is evidently willing to screw pre-existing customers like me who have exemplary payment history, near perfect credit, sufficient assets and income by making it hard to get out of my existing higher rate loan," said Fitz-Gerald. "Yet, the bank remains perfectly willing to take on new loans at lower rates from customers with whom they have no prior relationships and who represent entirely new risks."

"Long story short," said Fitz-Gerald, "I'll be taking my business elsewhere."

BAC stock was down 0.34% to $8.89 just after noon Thursday.

Related Articles and News:

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    Here is What's Wrong With Bank of America (NYSE: BAC)
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    Investing in Financial Stocks: Is Now the Time to Bank on C, COF, BAC or JPM?
  • Money Morning:
    Bank of America (NYSE: BAC) To Cut Borrowers' Balances in New Mortgage Deal
  • Reuters:
    Bank of America tops expectations on better credit quality
  • Barron's:
    Bank of America, Morgan Stanley Jump on Earnings
  • The Wall Street Journal:
    Bank of America Still Looking to Sell Things

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