Bank of America Corp., the second-biggest U.S. lender, posted quarterly profit that more than quadrupled and beat Wall Street estimates as the company quelled claims tied to defective mortgages. The stock rose 3.6% to its highest level in more than three years.
Fourth-quarter net income rose to $3.44 billion, or 29 cents a diluted share, from $732 million, or 3 cents, a year earlier, according to a statement today from the Charlotte, North Carolina-based firm. The average estimate of 27 analysts surveyed by Bloomberg was 27 cents, adjusted for one-time items. For the full year, profit more than doubled to $11.4 billion.
Chief Executive Officer Brian T. Moynihan, 54, has spent his four years atop Bank of America resolving disputes tied to shoddy home loans and foreclosures, mostly from his predecessor’s 2008 takeover of Countrywide Financial Corp. He signaled in November that attention is shifting from the mortgage cleanup to improving performance at operating units, calling his firm a “huge battleship” that is gaining speed.
“They’re looking considerably better than a year ago,” said Marty Mosby, a bank analyst at Guggenheim Securities LLC with a neutral rating on the stock. “The Street now believes their story, which is that remaining mortgage costs will be manageable.”
Shares React
Bank of America advanced to $17.38 at 10:15 a.m. in New York, its best level since May 2010. The lender gained 34% last year, just under the 35% advance of the KBW Bank Index, and it’s leading the 24-company benchmark this year with gains of almost 12%. Analysts including Citigroup Inc.’s Keith Horowitz upgraded the firm to a buy in anticipation that costs will recede.
The bank showed improvements in various performance gauges as revenue in the quarter rose 14% to $22.3 billion, excluding accounting charges. Adjusted net interest income increased 4%, according to the bank, and non-interest income jumped 28% as costs eased for refunds to investors on defective mortgages.
The net interest margin, the difference between what a bank pays for funds and what it earns on loans and investments, improved to 2.56% from the 2.44% reported in the third quarter and 2.35% a year earlier.
The return on average shareholder’s equity was 5.74% in the fourth quarter and 4.62% for the full year. That’s less than the company’s managers would like, Chief Financial Officer Bruce Thompson told analysts during a conference call. By contrast, Wells Fargo & Co. reported a 13.8% ROE for the quarter and JPMorgan Chase & Co.’s was 10%.
FICC Results
Global markets, the trading operations overseen by co-Chief Operating Officer Thomas K. Montag, posted a 3.9% drop in quarterly profit to $341 million excluding accounting adjustments tied to credit. Revenue in the division rose 16% to $3.8 billion on rising equities results.
Revenue in the fixed-income, currency and commodities sales and trading division increased 16% $2.1 billion on stronger results in credit and mortgage products. Equities sales and trading revenue added 27% to $904 million on increased market volumes. Income at the global banking unit fell 9% to $1.27 billion on a higher provision for credit losses.
“We feel very good about the pipelines that we have in the investment banking business,” Thompson said in remarks to reporters. The year is off to a “reasonable start,” and “there’s nothing at this point that would have me send up a note of caution besides just realizing that the fourth-quarter was extremely strong.”
Cost Savings
Profit increased 36% to $1.97 billion at consumer and business banking, run by David Darnell, and losses narrowed in consumer real estate to $1.1 billion from $3.7 billion. First-mortgage originations declined 46% as demand faded, the bank said. Global wealth and investment net income rose 35% to a record $777 million, according to the bank.
The efficiency ratio, a gauge of cost controls, deteriorated to 80% from 75% in the third quarter, while improving from 97% a year earlier. The bank said it met its cost-cutting targets for 2013. Moynihan eliminated 5,826 full-time jobs during the quarter, reducing the staff to 242,117, a 9% annual drop.
Litigation expense was $2.3 billion before taxes. Results benefited from a $1.9 billion drop in its credit provision from the year-earlier period amid falling loan losses. Reserve releases will slow down in 2014, Thompson said.
Economic Boost
“You’ve got to give them a lot of credit,” former General Electric Co. Chairman Jack Welch said today in an interview on Bloomberg TV with Erik Schatzker and Trish Regan. “They were down as low as you can get and Brian’s brought the team back. He’s done a good job.”
Investors could choose Bank of America and bigger rival JPMorgan to take advantage of an improving U.S. economy, Horowitz wrote in a Jan. 2 research note.
Bank of America “remains the most dependent of its peers on U.S. economic growth,” said Matthew Burnell, Wells Fargo’s bank analyst, in a note after results were announced. “However, we would not expect the stock to trade significantly above tangible book value until management demonstrates greater progress in resolving legacy mortgage issues and restoring a more meaningful dividend.” He has a neutral rating on the company, which reported tangible book value of $13.79 a share.
The bank’s top executives declined during the analysts’ conference call to elaborate on plans for any payout increases.
Legal Outlook
Moynihan has spent more than $50 billion on mortgage and foreclosure disputes and still faces demands that the firm atone for activities that contributed to the 2008 credit crisis.
Bank of America may have to pay $5 billion to $8 billion to settle a Federal Housing Finance Agency suit after JPMorgan.’s $4 billion accord set “a relatively high bar,” Fitch Ratings said in October. The FHFA lawsuit cited about $57 billion of mortgage-backed securities from Bank of America, compared with about $33 billion in the JPMorgan case, Fitch said.
The lender also faces a U.S. lawsuit for claims it misled investors over the quality of mortgages within an $850 million bond and said in October that the Justice Department may file another suit tied to home loans.
JPMorgan said yesterday that fourth-quarter profit fell 7% at the New York-based bank to $5.28 billion on costs from legal settlements. San Francisco-based Wells Fargo, the biggest home lender, said net income rose 10% to $5.61 billion, setting a record for the quarter and the year. Citigroup reports results tomorrow.