TEXT-Fitch says Bank of America Q3 core earnings modestly improve
Oct 17 - Bank of America (BAC) reported stated 3Q'12 net income of $340 million, down from $2.5 billion from the sequential quarter as a number of items including DVA adjustments and other charges impacted results. Fitch Ratings calculated pre-tax profits increased to $4.4 billion in 3Q'12, up from $2.8 billion in 2Q'12. Operating profitability as measured by return on assets (ROA) was 0.8% in 3Q'12, up modestly from 0.5% in 2Q'12. While Fitch acknowledges this modest improvement, it also notes that BAC's level of operating performance measured by ROA remains below the average of the top U.S. Banks that have reported to date. Fitch's calculated figures noted above exclude DVA adjustments and various other gains/charges. Furthermore, Fitch expects BAC's level of operating performance to continue to lag peers over a near-to-intermediate term time horizon. BAC's modest core earnings improvement was in part driven by improved funding costs, particularly as BAC continues to improve its overall funding profile by retiring higher cost long-term debt. Other drivers of earnings included an uptick in investment banking and global markets income, though the improvement in this segment did lag peers, as well as a boost in mortgage banking income given strong originations amid the rally in mortgage rates during the quarter. Fitch would also note that BAC continues to make improvements on its cost structure, particularly personnel, as it works to streamline its operations. Fitch notes that BAC's capital ratios continue to significantly improve. Total Tier 1 common equity grew by $2.3 billion during the quarter to $136 billion as of 3Q'12. Given that risk-weighted assets were relatively flat from the sequential quarter, the company's Tier 1 common ratio under Basel 1 modestly ticked up to 11.41% in 3Q'12 from 11.24% in 2Q'12. Additionally, BAC also disclosed that its Tier 1 common ratio under Basel 3 proposals, including the U.S. NPR, increased to 8.97% in 3Q'12, which is better than Fitch's expectations. While these capital improvements are noteworthy, Fitch also notes that BAC's bottom line earnings continue to be plagued by various litigation and other charges. In 3Q'12 BAC's earnings were impacted by the previously announced $1.6 billion litigation expense including the Merrill Lynch class action settlement, the $0.8 billion charge related to the change in the U.K. tax rate, and the $325 million representation and warranty settlement with Syncora which was announced in 2Q'12, but effected in 3Q'12 results. Additionally, BAC continued to experience an increase in mortgage representation and warranty claims during the quarter, primarily from claims emanating from GSE's, particularly Fannie Mae, as well as private label securitizations. As a result, the company booked an additional $307 million of representation and warranty provision, which brings the total reserve for this to $16.3 billion as of 3Q'12. Fitch expects these types of developments to continue to drag on net earnings and also absorb management attention for some time to come. While, on balance, BAC's credit quality continued to improve, the company did experience a higher level of net-charge offs (NCOs) related to new regulatory guidance on loans discharged as a part of Chapter 7 bankruptcy. While this impacted the entire industry during the quarter, BAC experienced an increase of $478 million of NCOs primarily in residential mortgage and home equity due to this change in guidance. Fitch would note that the remainder of the loan portfolio experienced asset quality improvement, on balance.
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