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Monday, 01 September 2014

BofAngst

Brian Moynihan can't ignore Citi's regime change

Bank of America boss Brian Moynihan can’t ignore the regime change at cross-town rival Citigroup. His three years in the corner office is less than Vikram Pandit had, but he faces the same challenges to boost performance. BofA’s third-quarter return on equity of just 6.3 percent is a case in point. While improving, Moynihan needs to do more before he, too, clashes with his board and shareholders.

The results weren’t as bad as implied by the dismal $340 million headline profit reported on Wednesday. One-offs like the $1.9 billion charge for the bank’s improving credit quality and a $1.6 billion hit for litigation costs, including the settlement of the Merrill Lynch class action suit, took a big bite out of earnings.

Add those back in, on a 33 percent tax rate, together with an $800 million expense from a UK tax change, and earnings would have swelled to $3.5 billion. Moynihan also managed to boost the bank’s regulatory capital under Basel III to 8.97 percent, more than one percentage point higher than last quarter and now the highest of the three U.S. universal banks.

And Moynihan has made some good progress. Seriously delinquent mortgages declined substantially in the three months to September while there’s greater clarity on what it still might have to pay Fannie Mae and Freddie Mac. And the bank’s stock has been on a tear, up 64 percent so for this year.

But it still languishes at less than half of book value. That implies that shareholders either don’t trust the bank’s numbers or, more likely, don’t believe Moynihan is any closer to boosting earnings above the cost of capital - generally assumed to be around 10 percent. A similarly sub-par performance at Citi added to growing friction between Pandit and the bank’s directors.

But like his departing rival, Moynihan doesn’t have too many levers. He’s already slashing costs and only the Federal Reserve can approve returning capital to shareholders. He does, though, have at least one opportunity to go on the offensive: home lending. BofA has lost significant market share to Wells Fargo and smaller banks. With housing turning and lending standards much stronger, the bank should be able to grow its own lending operations significantly.

Moynihan has done an admirable job cleaning up the mess left by Ken Lewis. But he’ll need to start growing the top line if he wants to stay at the top.

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Context News

On Oct. 17, Bank of America reported a net profit of $340 million, or nil on a per share basis, in the third quarter.

The bank’s earnings included a number of one-off negative charges such as $1.9 billion on the bank’s improving credit quality during the quarter and $1.6 billion on litigation expenses that included the settlement of the Merrill Lynch class action suit.

The bank’s return on equity was 6.3 percent after adjusting for one-time, negative charges including one related to a reduction in the UK tax rate.

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